**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-K**

 

**x****     ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the fiscal year ended July 31,2010**

 

**or**

 

**o****      TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from              to              **

 

**CommissionFile No. 001-31337**

 

**CANTEL MEDICAL CORP.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                 | ** ** | **22-1760285**      |
|----------------------------------------------|------------|---------------------|
| (State or other jurisdiction of              |       | (I.R.S. employer    |
| incorporation or organization)               |       | identification no.) |
|                                         |       |                |
| **150 Clove Road, Little Falls, New Jersey** | ** ** | **07424**           |
| (Address of principal executive offices)     |       | (Zip code)          |

 

Registrant’s telephone number, including areacode: **(973) 890-7220**

 

Securities registered pursuant to Section 12(b) of the Act:

 

| ** **                             | ** ** | **Name of each exchange** |
|----------------------------------------|------------|------------------------------------------|
| **Title of each class** | ** ** | **on which registered**        |
| Common Stock, $.10 par value           |       | New York Stock Exchange                  |

 

Securities registered pursuant to Section 12(g) of the Act: **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x

 

IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesoNox

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  Yes o No x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer x         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company o |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas last sold, or the average bid and asked price of such common equity, as ofthe last business day of the registrant’s most recently completed second fiscalquarter, as quoted by the New York Stock Exchange on that date: $257,683,273.

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock as of the close of business on September 17, 2010: 16,866,284

 

Documentsincorporated by reference:  Definitiveproxy statement to be filed pursuant to Regulation 14A promulgated under theSecurities Exchange Act of 1934 in connection with the 2010 Annual Meeting ofStockholders of Registrant.

 

 

 

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**ForwardLooking Statements**

 

This Annual Report on Form 10-K contains “forward-lookingstatements” as that term is defined under the Private Securities LitigationReform Act of 1995 and releases issued by the Securities and ExchangeCommission (the “SEC”) and within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on currentexpectations, estimates, or forecasts about our businesses, the industries inwhich we operate, and the beliefs and assumptions of management; they do notrelate strictly to historical or current facts. We have tried, whereverpossible, to identify such statements by using words such as “expect,” “anticipate,”“goal,” “project,” “intend,” “plan,” “believe,” “seek,”  “may,” “could,” and variations of such wordsand similar expressions. In addition, any statements that refer to predictionsor projections of our future financial performance, anticipated growth andtrends in our businesses, and other characterizations of future events orcircumstances are forward-looking statements. Readers are cautioned that theseforward-looking statements are only predictions about future events, activitiesor developments and are subject to numerous risks, uncertainties, andassumptions that are difficult to predict including, among other things, thefollowing:

 

·                  the increasing market share of single-use dialyzers relative to reusedialyzers in the United States

·                  our continuing loss of dialysate concentrate business

·                  our dependenceon a concentrated number of customers in three of our largest segments

·                  severity of flu outbreaks and level of urgency developed by customerswith respect to pandemic preparedness

·                  the volatility of fuel and oil prices on our raw materials anddistribution costs

·                  the acquisition of new businesses and successfully integrating and operatingsuch businesses

·                  the adverseimpact of increased competition on selling prices and our ability to competeeffectively

·                  foreign currency exchange rate fluctuations and trade barriers

·                  the impact of significant government regulation on our businesses

 

You should understand that it is not possible topredict or identify all such factors. Consequently, you should not consider theforegoing items to be a complete list of all potential risks or uncertainties.See “Risk Factors” below for a discussion of the above risk factors and certainadditional risk factors that you should consider before investing in the sharesof our common stock.

 

Allforward-looking statements herein speak only as of the date of this report. Weexpressly disclaim any obligation or undertaking to release publicly anyupdates or revisions to any forward-looking statements contained herein toreflect any change in our expectations with regard thereto or any change inevents, conditions or circumstances on which any such statement is based.

 

Forthese statements, we claim the protection of the safe harbor forforward-looking statements contained in Section 27A of the Securities Actand Section 21E of the Exchange Act.

 

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**PART I**

 

**Item 1.                  BUSINESS.**

 

**General**

 

We are a leading provider of infection prevention and control productsand services in the healthcare market, specializing in the following operatingsegments:

 

·                  Water Purification andFiltration: Water purification equipment and services,filtration and separation products, and disinfectants for the medical,pharmaceutical, biotech, beverage and commercial industrial markets.

 

·                     Healthcare Disposables: Single-use,infection prevention and control products used principally in the dental marketincluding face masks, sterilization pouches, towels and bibs, tray covers,saliva ejectors, germicidal wipes, plastic cups and disinfectants.

 

·                  Endoscope Reprocessing: Medicaldevice reprocessing systems, disinfectants, enzymatic detergents and othersupplies used to high-level disinfect flexible endoscopes.

 

·                  Dialysis: Medicaldevice reprocessing systems, sterilants/disinfectants, dialysate concentratesand other supplies for renal dialysis.

 

·                  Therapeutic Filtration: Hollow fibermembrane filtration and separation technologies for medical applications.(Included in All Other reporting segment).

 

·                  Specialty Packaging: Specialtypackaging and thermal control products, as well as related compliance training,for the transport of infectious and biological specimens and thermallysensitive pharmaceutical, medical and other products. (Included in All Otherreporting segment).

 

·                  Chemistries: Sterilants,disinfectants, detergents and decontamination services used in variousapplications for infection prevention and control. (Included in All Otherreporting segment).

 

Mostof our equipment, consumables and supplies are used to help prevent theoccurrence or spread of infections.

 

Throughoutthis document, references to “Cantel,” “us,” “we,” “our,” and the “Company” arereferences to Cantel Medical Corp. and its subsidiaries, except where thecontext makes it clear the reference is to Cantel itself and not itssubsidiaries.

 

**RecentAcquisition — Subsequent to July 31, 2010**

 

***Acquisition of Gambro Renal Products, Inc. Water Business***

 

On October 6, 2010, our Mar Cor Purification subsidiary (“Mar Cor”)acquired from Gambro Renal Products, Inc. (“GRP”) and a Swedish-basedaffiliate of GRP (collectively, “Gambro”) certain net assets and the exclusiverights in the United States to manufacture and sell Gambro’s water treatmentproducts used in the production of water for hemodialysis (“Gambro Water” orthe “Gambro Acquisition”). Immediately following the acquisition, we commencedsales and service of all Gambro water products, components, parts andconsumables solely intended for the United States market. The manufacturing ofthese products will be transitioned into our own manufacturing facility inPlymouth, Minnesota over the next few months. With an installed base of over1,200 water equipment customers in the United States and annual pre-acquisitionrevenues of approximately $14 million (approximately 80% of such revenues arefrom one customer), the Gambro Acquisition is anticipated to expand our WaterPurification and Filtration’s annual business by approximately 19% in terms ofsales, particularly with respect to product and service sales volumes in bothexisting and new dialysis clinics across the United States. Total considerationfor the transaction, excluding transaction costs, was approximately$23,750,000, of which $3,100,000 will be paid in six quarterly payments ending April 2012.The Gambro Acquisition will be included in our Water Purification andFiltration operating segment.****See “—ReportingSegments-Water Purification and Filtration” and Note 3 to the ConsolidatedFinancial Statements.

 

The reasons for the acquisition were as follows: (i) the expansionof our water purification product line, particularly in the area of costeffective heat sanitizing water purification equipment, (ii) theopportunity to add an installed equipment base of

 

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businessinto which we can (a) increase sales and service revenue while improvingthe density and efficiency of the Mar Cor service network and (b) increaseconsumable sales per clinic; (iii) the potential revenue and cost savingssynergies and efficiencies that could be realized through optimizing andcombining the acquired assets (including Gambro employees) into Mar Cor; and (iv) theexpectation that the acquisition will be accretive to our future earnings pershare.

 

Since the acquisition was completed on October 6, 2010, theresults of operations of Gambro Water are not included in our results ofoperations for any period presented herein.

 

**Fiscal 2010 Acquisition**

 

***Acquisition of Purity Water Company of SanAntonio, Inc.***

 

OnJune 1, 2010, Mar Cor acquired all of the issued and outstanding capitalstock of Purity Water Company of SanAntonio, Inc. (“Purity”), a private company with pre-acquisitionannual revenues of approximately $2,300,000 based in San Antonio, Texas thatdesigns, installs and services high quality, high purity water systems for usein laboratory, industrial, medical, pharmaceutical and semiconductorenvironments. Total consideration for the transaction was $2,014,000. The results of operations of Purityare included in our results of operations in fiscal 2010 subsequent to June 1,2010 and are not included in any prior periods. Purity is included in the WaterPurification and Filtration segment. Following the acquisition, Purity wasmerged with and into Mar Cor.

 

The primary reason for the acquisition was to add a base of businessand expand the Mar Cor service network in the southwest United States.

 

**Fiscal 2009 Acquisition**

 

***Acquisition of G.E.M. Water Systems Int’l,LLC***

 

OnJuly 31, 2009, we purchased substantially all of the assets of G.E.M. Water Systems Int’l, LLC (“G.E.M.”),including the building housing its operations, for $4,468,000, includingtransaction costs. G.E.M, basedin Buena Park, California, designs,installs and services high quality water and bicarbonate systems for use indialysis clinics, hospitals and other healthcare facilities. The acquiredbusiness had pre-acquisition revenues of approximately $3,500,000. Theresults of operations of G.E.M. are included in our results of operations forthe entire fiscal 2010 and are not included for any prior period, but theassets of G.E.M. are included in our Consolidated Balance Sheets as of both July 31,2010 and 2009 (since the acquisition occurred on the final day of fiscal 2009).The principal reason for the acquisition was the strengthening of our sales and service presence and base of businessin California with a significant concentration of dialysis clinics andhealthcare institutions. The operating results of G.E.M. are included in ourWater Purification and Filtration segment.

 

**Reporting Segments**

 

The following table gives information as to the percentage ofconsolidated net sales from operations accounted for by each of our reportingsegments:

 
| ** **                        | ** ** | **Year Ended July 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                        | ** ** | **%**                                  | ** ** | **%** | ** ** | **%** | ** ** |
|                              |       |                                   |       |   |   |   |   |
| Water Purification and Filtration |       | 27.2                                   |       | 26.5 |   | 26.6 |   |
| Healthcare Disposables            |       | 25.5                                   |       | 24.7 |   | 23.5 |   |
| Endoscope Reprocessing            |       | 23.9                                   |       | 20.1 |   | 18.8 |   |
| Dialysis                          |       | 16.3                                   |       | 21.7 |   | 24.1 |   |
| All Other                         |       | 7.1                                    |       | 7.0 |   | 7.0 |   |
|                              |       | 100.0                                  |       | 100.0 |   | 100.0 |   |

 

Fora presentation of net sales, operating income and total assets by reportingsegment, see Note 17 to the Consolidated Financial Statements.

 

Duringfiscal 2010, we changed our internal reporting processes to include a newoperating segment called Chemistries to reflect the way the Company, throughits executive management, manages, allocates resources and measures theperformance of its businesses. This new operating segment is the combination ofa small portion of our existing sterilant 

 

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business,comprised of products sold on an OEM basis and previously recorded in our WaterPurification and Filtration segment, and a new business operation that wascreated to capitalize on our chemistry expertise and expand our productofferings in existing and new markets within the infection prevention andcontrol arena. This new Chemistries operating segment has been combined forreporting purposes with our Therapeutic Filtration and Specialty Packagingoperating segments into the All Other reporting segment. All periods presentedhave been restated to reflect this change.

 

**WaterPurification and Filtration**

 

***General***

 

Wedesign, develop, manufacture, sell, install and service water purificationsystems and accessories for dialysis and other specific healthcareapplications, research laboratories and pharmaceutical, beverage and commercialindustrial customers. These systems always start with a public water source andprovide total purification solutions specific to our customers’ needs and siteconditions, ranging from low-volume, reverse osmosis and deionization systems,to high-volume, complete turnkey purification systems. We generally sell theequipment directly to our customers in the United States, Puerto Rico, andCanada and through various third-party distributors in other internationalmarkets.

 

Purificationsystems can include combinations of proven treatment methods such as (i) carbonfiltration, which removes chlorine and dissolved organic contamination byadsorption; (ii) reverse osmosis (RO), which is a filtration process thatforces liquid through non-porous or semi-porous membranes to remove particles,microorganisms and dissolved minerals and organics; (iii) ultra-filtration,which removes bacteria, viruses and other ultrafine impurities from water usinga membrane similar in design to a RO membrane; (iv) deionization, which isan ion exchange platform that requires resin regeneration (see “Service &Maintenance; Resin Regeneration” below); and (v) electro-deionization,which is a form of deionization that is based on the conductance of electricalcharges. We have significant expertise in packaging these technologies to meetspecific requirements of customers requiring high purity water that is free ofbiological contamination.

 

Weare the market leader in the supply of United States Food and DrugAdministration (“FDA”) 510(k)(1) cleared water purification systems to thedialysis industry in North America. During fiscal 2010 approximately 60% of oursales in this segment were derived from sales and service to U.S. dialysisclinics. This portion of our business will continue to grow during fiscal 2011due to the Gambro Acquisition.

 

Ourgrowth in the Water Purification and Filtration segment, particularly in themedical/dialysis arena, over the past several years has been driven principallyfrom acquisitions. Since May 2006 we have acquired six water purificationbusinesses, the most significant of which were the water dialysis business ofGE Water & Process Technologies (“GE Water”) in March 2007 andthe recent acquisition of Gambro Water in October 2010.

 

***Water Purification Equipment***

 

Ourproduct line of water purification systems has been designed to producebiologically pure water targeted for use in the healthcare, life sciences, foodand beverage, and commercial industrial markets. We have significant expertisein the design and manufacture of water treatment systems engineered to meetspecific water requirements of the healthcare, life sciences and beverageindustries. Such expertise includes water for hemodialysis and all grades of USPharmacopeia (USP) water (i.e., water meeting the FDA enforced standards of theUnited States Pharmacopeia) including “USP Purified Water” which is an FDArequirement for the labeling of “purified” bottled water. We also package thesesame technologies and expertise in industrial designs to meet the requirementsfor high purity water in the commercial industrial markets such as boilerfeedwater production or high quality rinsewater production.

 

OurBiolabTM equipment line includes systems that utilizeeither chemical or heat disinfection to sanitize the equipment. Our HX productline provides total heat disinfection of the entire water purification systemand water distribution loop. Heat disinfection is especially attractive to thelife science marketplace, which requires the highest levels of biologicalpurity. Heat sanitization is environmentally friendly and prevents theformation of dangerous biofilms. Heat disinfection has been used in thepharmaceutical industry for years and has been gaining increased acceptance inthe dialysis market.

 

Ourstandard line of equipment includes the Biolab equipment line of reverseosmosis (RO) machines 2200, 3300, 4400, 8400, RODI® combinationRO and electro-deionization system, and various heat disinfectingconfigurations, as well as the 23G, ZyzatechTM V and Z series, and theMilleniumTM, the leading medical portable reverse osmosis unit. Commencing in 

 

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(1) Most medical devices sold by the Company require the submission of a PremarketNotification 510(k) to the FDA and clearance of the submission by the FDAprior to commercial distribution.

 

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October 2010,these product lines are now complemented in the United States by the productlines exclusively licensed in the Gambro Acquisition, including the WRO 300,WRO 300H, CWP 100, WRO 101-104 and 106H, a leading heat disinfecting system.Our extensive product offerings can be configured to serve all of our targetmarkets.

 

Wealso offer pretreatment equipment, lab water equipment, a full range of servicedeionization tanks and specific equipment designed to support the life sciencesand industrial markets including peripheral equipment such as carts,bicarbonate and acid delivery systems with central and single mix distributionunits, and concentrate systems with central concentrate holding tanks.

 

Our systems meet water quality and good manufacturing practicestandards of the Association for the Advancement of Medical Instrumentation (“AAMI”).We have received 510(k) clearances from the FDA for all of our dialysiswater purification systems and bicarbonate mix and distribution systems to theextent required by law.

 

***Service & Maintenance; Resin Regeneration***

 

Weprovide service and maintenance for water purification systems in the UnitedStates and Canada through twenty regional offices (eighteen in the UnitedStates and two in Canada). These service centers are staffed with sales andservice personnel to support both scheduled and emergency customerrequirements. Each office provides 24-hour emergency service for our customersthrough a fleet of stocked service vehicles. Seven of the offices (Toronto,Montreal, Philadelphia, Boston, San Antonio, Chicago and Atlanta) are equippedwith resin regeneration plants (described below).

 

Resinregeneration (also known as service deionization and carbon exchange) is theprocess in which cylinders (pressure vessels with an inlet connection and anoutlet connection) are assembled, sanitized, and filled with ion exchangeresin, which is processed using hydrochloric acid and caustic soda. Thesecylinders are connected to a customer’s water supply. As the water passesthrough the ion exchange resin beads, minerals are removed. When the electricalcharge that is placed on the resin beads during the regeneration process isexhausted, the cylinders are exchanged for identical cylinders with regeneratedresin. The cylinders with exhausted resin are returned by service personnel toone of our regeneration plants and the resin is regenerated for use by the sameor another customer. Customers are charged for each cylinder replacement.

 

***Filtration***

 

We offer a full line of filters utilizing hollow fibermembrane technology. The filters, sold under the FiberFlo® Capsule Filters and FiberFlo Cartridge Filtersnames, are utilized to remove impurities from liquid streams for a wide range ofapplications. Such applications include the filtering of ultrapure water toremove bacteria and other contaminants in medical environments to provideprotection for patients undergoing treatments that use ultrapure water. Ourcartridge filters are validated to remove endotoxins in dialysis water, whichis included in our registration of the filters as Medical Devices under FDA 510(k) regulations.The filters are also used in medical device reprocessing systems to help meetreprocessing water quality guidelines outlined by the AAMI. In industrialapplications, the filters are used to protect systems from contamination fromparticulates and microorganisms.

 

OurFiberFlo filters are also being used in a variety of industries includingpharmaceutical manufacturing, food and beverage processing, cosmeticmanufacturing and electronics manufacturing. The filters are being usedincreasingly for the removal of bacteria and other contaminants from aqueoussolutions. These filters are engineered for point-of-use applications thatrequire very fine filtration. Their hollow fiber design provides a surface areathat is up to four times larger than traditional pleated filters that are usedin the same markets. The large surface area provides greater capacity andlonger filter life for the customer. FiberFlo Capsule Filters and CartridgeFilters are available in a variety of styles, sizes and configurations to meeta comprehensive range of customer needs and applications.

 

Otherproducts include microfiber and flat sheet membrane prefiltration productsdesigned to protect the FiberFlo filter products and prolong their life intheir intended applications.

 

FiberFlofilter products are sold directly and through various third-party distributorsin the United States, Puerto Rico, Canada and other international markets.

 

***Sterilants***

 

Minncare® Cold Sterilant is a liquid sterilant productused to sanitize and disinfect high-purity water systems. Minncare ColdSterilant is based on our proprietary peracetic acid sterilant technology, andis engineered to clean and 

 

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disinfectRO membranes and associated water distribution systems. Minncare Cold Sterilantis widely used in the dialysis, medical, pharmaceutical and other industries todisinfect ultrapure water systems as part of overall procedures to control thecontamination of systems by microorganisms and spores. Actril® Cold Sterilant is a ready-to-use formulationof our proprietary peracetic acid based sterilant technology. It is used forsurface disinfection in a variety of industries, including the medical andpharmaceutical industries.

 

**Healthcare Disposables**

 

Weare a leading manufacturer and reseller of single-use, infection controlproducts used principally in the dental office market. We offer a broadselection of core disposable dental products, comprising over 60 categories ofdental merchandise, including face masks, sterilization pouches, towels andbibs, tray covers, saliva ejectors and evacuators, germicidal wipes, plasticcups, surface barriers, eyewear, disinfectants and cleaners, hand careproducts, gloves, prophy angles, cotton products, needles and syringes,scalpels and blades, prophy pastes, and fluoride foams and gels. We believethat we maintain a leading market position in the United States for face masks,towels and bibs, tray covers, saliva ejectors, germicidal wipes, sterilizationpouches and plastic cups used in the dental market. Part of our strategyis to continue developing, licensing and/or acquiring branded products with adifferentiated feature set, ideally patent protected.

 

Wehave certain exclusive and non-exclusive license rights from a third party forBIOSAFE*®** *antimicrobial, a patentedchemistry applied to products, such as face masks, that reduces microorganismssuch as Influenza A, MRSA, VRE and Staph immediately upon contact. The BIOSAFEtreatment chemically binds to a product’s surface creating a long-lastingshield against microbial contamination. Because it mechanically kills the cell,it will not cause development of more resistant ‘superbugs.’ Within the UnitedStates, the sale of face masks treated with BIOSAFE antimicrobial for medicalapplications is subject to a 510(k) clearance by the FDA. Because ananticipated revision to the FDA Guidance Document pertaining to antimicrobialtreatments of medical devices has not been released by the FDA, we will beconsidering the submission of a 510(k) application in advance of the FDA’spublication of such revision.

 

Wehave also experienced continued and improved market acceptance of ourSure-CheckTM Sterilization Pouches and Comfort Plus® SalivaEjectors. The Sure-Check Sterilization Pouches are self-sealing pouches with apatented, multi-variable (parameter) Class 4 chemical indictor ink printedon the pouch both internally and externally. This multi-variable chemicalindicator provides the user with a reliable indication that the conditions forsterilization occurred without having to insert a separate chemical indicatorinto the pouch itself. The chemical indicator on the pouch reacts to all threekey sterilization parameters - time, temperature and presence of steam. TheComfort Plus Saliva Ejector uses a patented design featuring rounded edges,smooth surfaces and strategically placed suction ports that help to enhancepatient comfort while protecting delicate mucosal tissue.

 

Duringfiscal 2011, the Company will be introducing an innovative earloop face maskunder the SecureFitTM name.  This patent pending product incorporates analuminum strip on the bottom of the mask, allowing the wearer to adjust the fitof the mask to the contour of their face, minimizing the gapping that can occurwhile wearing traditional earloop face masks.  This feature will be madeavailable in the Company’s three ASTM product classifications — Low (Isofluid),Moderate (Procedural) and High (Ultra).

 

Webelieve that the concern generated over the novel H1N1 flu outbreak duringfiscals 2010 and 2009 significantly increased awareness of the prevention andcontrol of infectious diseases. We believe that we are well qualified toaddress the global need for face masks, disinfectants and other productsrelating to infection prevention and control, including flu preparedness. Theoutbreak and spread of the novel H1N1 flu in the United States resulted insignificantly increased sales of our face masks during our fourth quarter offiscal 2009 and the first and second quarters of fiscal 2010. We are nowexpanding our manufacturing capability of face masks and are well positioned toincrease production of face masks should the need arise due to a recurrence ofthe H1N1 flu or other outbreak of infectious disease.

 

Wemanufacture products accounting for approximately two-thirds of our net salesin this segment. We source the balance of our products from third-partysuppliers and contract manufacturers, certain of which are sold under exclusivedistributorship agreements. Overall, approximately 90% of our net sales in thissegment relate to products manufactured in the United States. The majority ofour healthcare disposable products are sold under the Crosstex® brand name. For certain of our customers, wealso produce private label products.

 

Ourhealthcare disposable products are sold to approximately 350 wholesalecustomers in over 90 countries, but with a significant majority in the UnitedStates. The wholesalers generally include major healthcare distributors, grouppurchasing organizations and co-operatives that sell our products to dentalpractices as well as medical, veterinary and educational institutions.

 

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**Endoscope Reprocessing**

 

***General***

 

Wedesign, develop, manufacture and sell endoscope reprocessing systems,sterilants, detergents and related supplies. Although endoscopes generally canbe manually disinfected, there are many problems associated with such methodsincluding the lack of uniform disinfection procedures, personnel exposure todisinfectant fumes and incomplete rinsing that could result in disinfectantresidue remaining in or on the endoscope. We****believeour endoscope reprocessing equipment offers several advantages over manualimmersion in disinfectants. Our products, which meet rigorous high-leveldisinfection assurance standards and regulations, allow the safe and effective useof endoscopes in healthcare facilities throughout the world.

 

Ourautomated endoscope reprocessing equipment is designed to pre-rinse the device,then continuously pump disinfectant around the endoscope and through all of itsinternal working channels, resulting in thorough and consistent high- leveldisinfection. After the disinfection phase, all internal channels and externalsurfaces are thoroughly rinsed to completely remove any disinfectant residue.This automated process inhibits the buildup of biofilms in the working channelsand renders the endoscope safe for the next patient use. In addition, theentire high-level disinfection process can be completed with minimalparticipation by the operator, freeing the operator for other tasks, reducingthe exposure of personnel to the chemicals used in the disinfection process andreducing the risk of transmission of infectious diseases. Our reprocessingequipment also reduces the risks associated with inconsistent manualdisinfecting.

 

***Endoscope Reprocessing Products and Services***

 

OurMedivators® productportfolio represents the most comprehensive offering of capital equipment,chemistries, consumables and services that are used to pre-clean, leak test,clean and disinfect flexible endoscopes from the point of removal from apatient through utilization in the next patient procedure.

 

OurMedivators line of endoscope reprocessing systems includes several automatedsystems, such as the Advantage®, Advantage PlusTM and DSD-201 systems, which are microprocessor-controlled,dual-basin, asynchronous endoscope disinfection systems, and the SSD-102, whichis a single-basin version of the DSD-201 system. Our Advantage and AdvantagePlus endoscope reprocessing systems represent technologically advancedautomated systems designed to be compliant with all North American and Europeanstandards and to compete against the other sophisticated systems currentlyavailable both in Europe and North America. All of the automated disinfectionmachines can be used on a broad variety of endoscopes and are programmable bythe user. Certain models of the dual-basin systems can disinfect up to fourendoscopes at a time. In fiscal 2009, the FDA and Health Canada cleared ourfirst and most advanced single—use chemistry reprocessor, the Advantage PlusSystem. This new reprocessor was cleared for use exclusively with our newsingle-use chemistry, Rapicide® PA, aperacetic acid based, high-level disinfectant with a five-minute contact timeused at 30 degrees Celsius, giving it superior material compatibility.

 

InApril 2010, Medivators received clearance from the FDA to market the newlydeveloped DSD-Edge, a single-use chemistry version of the DSD-201, which hadreceived clearance from Health Canada several months earlier. The DSD-Edge is CE(2) markedfor sale in European and Asian markets. We also have clearance to sell theDSD-Edge in Australia. We also manufacture the Medivators CER series ofcountertop semi-automated endoscope reprocessors. These products are morecompact, less expensive single and dual endoscope disinfection units.

 

OurMedivators equipment product line also includes a state-of-the-art endoscopeleak detection device that provides customers with superior accuracy, completeautomation and comprehensive electronic record keeping, and the Scope Buddy® endoscope flushing aid, a device thatminimizes the risk of worker repetitive motion injury associated with manualflushing of endoscopes, while increasing the consistency of cleaning resultsthrough standardization of the pre-cleaning process.

 

Inconnection with our endoscope reprocessing business, we manufacture Rapicideglutaraldehyde-based high-level disinfectant and sterilant, which has FDA 510(k) clearancefor a high-level disinfection claim of five minutes at 35 degrees Celsius. Thisdisinfection contact time is currently one of the fastest available of anyhigh-level disinfectant product sold in the United States. Rapicide hassuperior rinsibility which gives us a competitive market advantage. We alsosell Adaspor® peracetic-acid based high-level disinfectant,manufactured by a third party in Europe, for the European and Asian markets 

 

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(2) The CE marking (an acronym for the French *conformitéeuropéenne*) certifies that a product has met European Union (EU)health, safety and environmental requirements. Many of our medical devices must meet CE marking requirements prior tocommercial sale in Europe.

 

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thatcan be utilized in a wide variety of automated endoscope reprocessing systems.As stated above, we now also have clearances to market our new single-usechemistry Rapicide PA.

 

Ourproduct offerings also include Intercept® Detergent andWipes which are formulated especially for the cleaning and removal ofbiological and organic soils from medical device surfaces, including flexibleendoscopes. When used regularly, Intercept and Intercept Wipesprogressively remove built up layers of biofilm from endoscope channels andexterior surfaces. Biofilms are an acknowledged concern in health care aspotential sources of nosocomial infection agents (environmentally sourcedmicroorganisms that can be transmitted to patients during procedures ortreatment).

 

OurEndoscope Reprocessing segment offers various preventative maintenance programs,repair services and user training programs to support the effective operationof reprocessing systems over their lifetime. Medivators field service personneland international third-party distributors install, maintain, upgrade, repairand troubleshoot equipment.

 

***Marketing and Sales***

 

Wesell and service our endoscope reprocessing equipment, high-leveldisinfectants, cleaners and consumables through our own United States fieldsales and service organization. Outside of the United States, we sell primarilythrough independent distribution partners in Europe, Canada, Asia, Australiaand Latin America as well as our own Netherlands sales and serviceorganization.

 

**Dialysis**

 

***General***

 

Wedesign, develop, manufacture and sell reprocessing systems and sterilants fordialyzers (a device serving as an artificial kidney), as well as dialysateconcentrates and supplies utilized for renal dialysis. Our products are sold inthe United States and, to a significantly lesser extent, throughout the world.Our customer base is comprised of large and small dialysis chains as well asindependent dialysis clinics. We sell the products in the United Statesprimarily through our own direct distribution network, and in manyinternational markets either directly or under various third-party distributionagreements.

 

***Dialyzer Reprocessing Products and Services***

 

Duringdialysis, a dialyzer is used to filter fluids and wastes from a dialysispatient’s blood. Our dialyzer reprocessing products are limited to use bycenters that choose to clean, disinfect and reuse dialyzers for the samepatient, known as “dialyzer  reuse,”rather than discard the dialyzers after a single-use. Our products meetrigorous sterility assurance standards and regulations, thereby providing forthe safe and effective reuse of dialyzers used in dialysis clinics.

 

Webelieve that dialysis centers in the United States that reuse dialyzersgenerally derive an economic benefit since the per-procedure cost is less whenutilizing the dialyzer multiple times for the same patient rather than thewasteful and less environmentally friendly practice of using a dialyzer onlyone time per treatment. Additionally, dialyzer reuse significantly reduces thenegative environmental consequences of single-use dialyzers by dramaticallydecreasing the amount of bio-hazardous medical waste in landfills. Althoughpublic information is not available to accurately quantify the number ofdialysis centers currently employing dialyzer reuse versus single-use, it isapparent that, despite the cost effectiveness and environmental advantages ofdialyzer reuse, there has been a significant market shift to single-usedialyzers during the past decade.

 

Today,we believe that approximately one-third of all dialysis procedures in theUnited States reuse dialyzers. The shift from reusable to single-use dialyzersis principally due to the ease of using a dialyzer one time and the commitmentof Fresenius Medical Care (“Fresenius”), the largest dialysis provider chain inthe United States and a manufacturer of single-use dialyzers, to convertdialysis clinics performing reuse to single-use facilities. A continueddecrease in dialyzer reuse in the United States in favor of single-usedialyzers would have an adverse effect on our business. See “Risk Factors” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

Ourdialyzer reprocessing products include the Renatron® II AutomatedDialyzer Reprocessing System (“Renatron System”), the Renalog® RM Data Management System and Renalin® Cold 100 Sterilant, a peracetic acid basedsterilant.

 

TheRenatron System provides an automated method of rinsing, cleaning, testing andsterilizing dialyzers for reuse. The Renatron System includes a bar-codereader, a computer and the Renalog RM Data Management System, a software 

 

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accessorythat provides dialysis centers with automated record keeping and data analysiscapabilities. We believe our Renatron Systems are more dependable, easier to useand more efficient than competitive automated systems. We also believe that theRenatron Systems are the top selling automated dialyzer reprocessing systems inthe world.

 

OurRenalin 100 sterilant is a proprietary peracetic acid-based formula that, whenused with our Renatron System, effectively cleans, disinfects and sterilizesdialyzers without the hazardous fumes and potential disposal issues related toglutaraldehyde and formaldehyde reprocessing solutions. Renalin cold sterilantis the leading dialyzer reprocessing solution in the United States.

 

Wealso manufacture a comprehensive product line of test strips to measureconcentration levels of the peracetic acid chemistries we produce. These teststrips ensure that the appropriate concentration of sterilant is maintainedthroughout the required contact period, in addition to verifying that allsterilant has been removed from the dialyzer prior to patient use. We also sella variety of dialysis supplies manufactured by third parties.

 

OurDialysis segment offers various preventative maintenance programs and repairservices to support the effective operation of reprocessing systems over theirlifetime. Our field service personnel, dialysis center technicians andinternational third-party distributors install, maintain, upgrade, repair andtroubleshoot equipment.

 

***Dialysate Concentrates***

 

Ourrenal dialysis treatment products include a line of acid and bicarbonateconcentrates, referred to as dialysate concentrates, used by kidney dialysiscenters to prepare dialysate, a chemical solution that draws waste productsfrom the patient’s blood through a dialyzer membrane during the hemodialysistreatment. Dialysate concentrates are used in the dialysis process, whethersingle-use or reuse dialyzers are being utilized. These concentrates arefreight sensitive and due to the competitive landscape carry overall lowergross margins in our product portfolio.

 

**All Other**

 

Wealso operate other businesses, including the Specialty Packaging, TherapeuticFiltration and Chemistries operating segments. Due to the relatively small sizeof these businesses, they are combined in the All Other reporting segment.

 

***Specialty Packaging***

 

Weprovide specialty packaging and thermal control products for the transport ofinfectious and biological specimens as well as thermally sensitivepharmaceutical and medical products. Additionally, we provide compliancetraining services for the safe and proper transport of infectious andbiological specimens, as defined by various international and nationalregulatory organizations.

 

Webelieve that the increasing concern over the potential spread of infectiousagents, such as H1N1 flu, avian flu, E. coli and mad cow disease, as well aspotential acts of  bio-terrorism usingagents such as anthrax, have significantly increased awareness of the propershipping of diagnostic substances such as blood and tissues. We believe that weare particularly well qualified to meet the global need for compliant, secure,cost-effective packaging solutions for the shipping of infectious andbiological specimens.

 

Ourproducts include the Saf-T-Temp® brand line ofphase change materials (PCM) using both proprietary and licensed proprietarythermal technology for temperature-controlled shipments. These phase changematerials help maintain thermally sensitive specimens and products, such asvaccines, pharmaceuticals and diagnostic reagents, within a discretetemperature range during shipment. The discipline of “Cold Chain Management”continues to grow as manufacturers of thermally sensitive pharmaceuticals andmedical products, as well as clinical laboratories, search for more efficientand cost-effective methods to ensure the viability of their products and/orspecimens in accordance with quality control standards.

 

Inaddition, to meet regulatory requirements that require shippers of infectiousand biological substances to be trained and certified at least every two yearsor as often as regulations change, we offer a variety of training optionsallowing the customer to choose the method that best meets its needs. Weprovide open enrollment symposium-style training seminars in various cities,private seminar training at customers’ on-site locations, as well as self-pacedinternet and CD software. During fiscal 2010, we added Spanish as an additionallanguage option to our already existing English and French language options forour CD software and internet training programs.

 

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Our customer base consists of medical research companies,diagnostic, clinical and university laboratories, pharmaceutical andbiotechnology companies, United States and Canadian government agencies,hospitals and state public health departments. Our packaging, thermal andtraining products are distributed worldwide both directly andthrough third-party distributors.

 

***Therapeutic Filtration***

 

Ourtherapeutic filtration products are extracorporeal filters utilizing ourproprietary hollow fiber technology. These filters include hemoconcentrators,hemofilters and specialty filters utilized for therapeutic medicalapplications.

 

We manufacture, market and sell a comprehensive line ofhemoconcentrators. A hemoconcentrator is a device used by a perfusionist (ahealth care professional who operates heart-lung bypass equipment) toconcentrate red blood cells and remove excess fluid from the bloodstream duringopen-heart surgery. Because the entire blood volume of the patient passesthrough the hemoconcentrator during an open-heart procedure, thebiocompatibility of the blood-contact components of the device is critical.

 

Our hemoconcentrators are designed to meet the clinical requirements ofneonatal through adult patients. Our principal products are the Hemocor HPH®hemoconcentrators, which contain our proprietary polysulfone hollow fiber andalso feature a unique “no-rinse” design that allows it to be quickly andefficiently inserted into the bypass circuit at any time during an open-heartprocedure.

 

We also manufacture, market and sell a lineof Renaflo® II hemofilters. A hemofilter is a device that performshemofiltration in a slow, continuous blood filtration therapy used to controlfluid overload and acute renal failure in unstable, critically ill patients whocannot tolerate the rapid filtration rates of conventional hemodialysis. Thehemofilter removes water, waste products and toxins from the circulating bloodof patients while conserving the cellular and protein content of the patient’sblood. Our hemofilter line features no-rinse, polysulfone hollow fiber filtersthat requires minimal set-up time for healthcare professionals. The hemofilteris available in six different models to meet the clinical needs of neonatalthrough adult patients.

 

Ourproprietary hollow fiber membranes and therapeutic products are sold tobiotechnology manufacturers that integrate the filters into their ownproprietary systems and through third-party distributors. Historically, one ofour most successful specialty filters has been sold on a private label basis toa manufacturer of a respiratory therapy device that incorporates our filter intheir product, particularly for pediatric applications. In fiscal 2010, inaddition to providing filters and filter technologies to biotech manufactures,we have also signed agreements with certain customers to distribute theirfinished products in specific international markets.

 

***Chemistries***

 

Duringfiscal 2010, we changed our internal reporting processes to include a newoperating segment called Chemistries to reflect the way the Company, throughits executive management, manages, allocates resources and measures theperformance of its businesses. This new operating segment is the combination ofa small portion of our existing sterilant business, comprised of products soldon an OEM basis and previously recorded in our Water Purification andFiltration segment, and a new business operation that was created to capitalizeon our chemistry expertise and expand our product offerings in existing and newmarkets within the infection prevention and control arena.

 

Ournew Chemistries segment provides research and development and coordination ofmarketing strategies that capitalize on our portfolio of proprietarychemistries. The group supports and drives the pipeline of new chemistry-basedproducts for existing Cantel companies, manages and grows the existing OEM chemistryrelated businesses and is responsible for building new business revenuesspecific to the Chemistries Group. Substantial investment is being made inresearch and development to effectively leverage this business across a broadrange of infection prevention and control opportunities.

 

Weunderstand the increasing concern and costs associated with the spread of MRSA,C-Diff, Norovirus and other critical infectious agents, and have developedproducts and services to address these issues. One such service is our AreaDecontamination System which utilizes an EPA approved chemical sterilant andproprietary dry fog technology to disinfect rooms ranging from sportsfacilities, commercial and residential properties and bio safety labs tohospital operating rooms. As part of this service we also offer a uniqueantimicrobial agent that provides a protective layer on surfaces and othermaterials that assists in preventing recontamination of the area and transferof infectious agents to humans.

 

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Ourdetergents and disinfectants are based upon a wide variety of chemicals andprovide cleaning and disinfection in many healthcare environments. Peraceticacid represents one of the most effective chemistries in our portfolio and wehave recently launched a sterilization service business based upon a variationof this product. This service provides medical device, pharmaceutical andconsumer product companies the capability to sterilize their products at roomtemperature with a rapid turnaround time. Our REVOXsm sterilizationservice offers a valuable resource for companies attempting to avoidcompatibility issues associated with eliminating toxic residues or maintainingfunctionality with their heat sensitive devices.

 

**Government Regulation**

 

Many of our products are subject to regulation by the FDA, whichregulates the testing, manufacturing, packaging, distribution and marketing ofour medical devices and water purification devices in the United States. Delaysin FDA review can significantly delay new product introduction and may resultin a product becoming “dated” or losing its market opportunity before it can beintroduced. Certain of our products may also be regulated by other governmentalor private agencies, including the Environmental Protection Agency,Underwriters Lab, Inc. (“UL”), and comparable agencies in certain foreigncountries. The FDA and other agency clearances generally are required before wecan market such new or significantly changed existing products in the UnitedStates or internationally. The FDA and certain other international governmentalagencies also have the authority to require a recall or modification ofproducts in the event of a defect.

 

TheFood, Drug and Cosmetic Act of 1938 and Safe Medical Device Act of 1990 requirecompliance with specific manufacturing and quality assurance standards forcertain of our products. The regulations also require manufacturers toestablish a quality assurance program to monitor the design and manufacturingprocess and maintain records that show compliance with FDA regulations and themanufacturer’s written specifications and procedures relating to its medicaldevices. The FDA inspects medical device manufacturers for compliance with thecurrent Quality Systems Regulations (“QSR’s”). Manufacturers that fail to meetthe QSR’s may be issued reports or citations for non-compliance.

 

Inaddition, many of our infection prevention and control products sold in Canada,Europe and Japan are subject to comparable regulations and requirements asthose described above. International regulatory bodies often establish varyingregulations governing product standards, packaging requirements, labelingrequirements, import restrictions, tariff regulations, duties and taxrequirements. For example, as a result of our sales in Europe, we were requiredto be certified as having a Quality System that meets the ISO 13485-2003standard.

 

Many of our products must also meet the requirements of the EuropeanMedical Device Directive (“MDD”) for their sale into the European Union. Thiscertification allows us, upon completion of a comprehensive technical file, toaffix the CE mark to our products and to freely distribute such productsthroughout the European Union. Failure to maintain CE mark certification couldhave a material adverse effect on our business.

 

Our endoscope and dialyzer reprocessing products, as well as ourCanadian water purification equipment manufacturing facility and many of ourproducts manufactured in Canada, are subject to regulation by Health Canada —Therapeutic Products Directorate (“TPD”), which regulates the distribution andmarketing of medical devices in Canada. Certain of such products may beregulated by other governmental or private agencies, including CanadianStandards Agency (“CSA”). TPD and other agency clearances generally arerequired before we can market new medical products in Canada. The HealthProducts and Food Branch Inspectorate (“HPFBI”) governs problem reporting,modification and recalls. HPFBI also has the authority to require a recall ormodification in the event of defect. In order to market our medical products inCanada, we hold a Medical Device Establishment License, as well as certainmedical device licenses by product, as provided by HPFBI.

 

Certain of our specialty packaging productshave been independently tested by a third-party laboratory and certified byTransport Canada. These certified packaging products as well as our otherspecialty packaging products have been designed to meet all applicable nationaland international standards for the safe transport of infectious and biologicalsubstances. Such standards include those issued by Canadian General StandardsBoard, Transport of Dangerous Goods Regulations Canada, InternationalCivil Aviation Organization, International Air Transport Association, andthe United States Code of Federal Regulations Title 49.

 

Federal, state and foreign regulations regarding the manufacture andsale of our products are subject to change. We cannot predict what impact, ifany, such changes might have on our business.

 

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**Sources and Availability of Raw Materials**

 

We purchase raw materials, sub-assemblies, components and othersupplies essential to our operations from numerous suppliers in the UnitedStates and abroad. The principal raw materials that we use to conductoperations include chemicals, paper pulp, resin, stainless steel and plasticcomponents. These raw materials are obtainable from several sources and aregenerally available within the lead times specified to vendors.

 

Fromtime to time we experience price increases for raw materials, with no guaranteethat such increases can be passed along to our customers. For example, duringfiscal 2008 we experienced unprecedented price increases in certain rawmaterials, including chemicals, paper pulp and plastics (resins and bottles).In addition, we experienced significant difficulty in obtaining certainchemicals in fiscal 2008 due to apparent shortages by certain suppliers.Although prices of raw materials have decreased and we do not currently foreseeextraordinary difficulty in obtaining the materials, sub-assemblies,components, or other supplies necessary for our business operations, we cannotpredict if similar difficulties as those experienced in fiscal 2008 will occurin the future that may adversely affect our business.

 

**Intellectual Property**

 

We protect our technology and products by, among other means, filingUnited States and foreign patent applications. There can be no assurance,however, that any patent will provide adequate protection for the technology,system, product, service or process it covers. In addition, the process ofobtaining and protecting patents can be long and expensive. We also rely upontrade secrets, technical know-how and continuing technological innovation todevelop and maintain our proprietary position.

 

As of September 17, 2010, we held 49 United States patents and 41foreign patents, and had 11 United States patents and 22 foreign patentspending. The majority of our United States and foreign patents, for individualproducts, are effective for twenty years from the filing date. The actualprotection afforded by a patent, which can vary from country to country,depends upon the type of patent, the scope of its coverage and the availabilityof legal remedies in the country. We believe that the patents in each of oursegments are important. In addition, we license from independent third partiesunder certain patents, trade secrets and other intellectual property, the rightto manufacture and sell our sterilants and Rapicide disinfectant (see “—ReportingSegments-Endoscope Reprocessing”), water purification equipment using Gambrotechnology (see “—Acquisition of Gambro Renal Products, Inc. WaterBusiness”), phase change material products (see “—Reporting Segments-AllOther-Specialty Packaging”), products utilizing BIOSAFE antimicrobial (see “—ReportingSegments-Healthcare Disposables”) and therapeutic filters utilizing a certainadditive designed to enhance the safety and effectiveness of the filters (see”—ReportingSegments-All Other-Therapeutic Filtration”). These licenses, each of which arelong-term, are critical to our commercialization of those products.

 

Ourproducts and services are sold around the world under various trade names,trademarks and brand names. We consider our trade names, trademarks and brandnames to be valuable in the marketing of our products in each segment. As of September 17,2010, we had a total of 404 trademark registrations in the United States and invarious foreign countries in which we conduct business, as well as 47 trademarkapplications pending worldwide.

 

**Seasonality**

 

Our businesses generally are not seasonal in nature.

 

**Principal Customers**

 

None of our customers accounted for 10% or more of our consolidated netsales during fiscal 2010. However, Fresenius and DaVita each accounted forapproximately 7% of our consolidated net sales. In addition, as a result of theGambro Acquisition, DaVita (the largest customer of Gambro Water) would haveaccounted for approximately 11% of our consolidated net sales during fiscal2010.

 

Except as described below, none of our segments are reliant upon asingle customer, or a few customers, the loss of any one or more of which couldhave a material adverse effect on the segment.

 

In our Water Purification and Filtration segment, one customer,Fresenius, accounted for approximately 24% of our segment net sales. The lossof a significant amount of business from this customer could have a material adverseeffect on our Water Purification and Filtration segment.

 

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Our Healthcare Disposables segment is reliant on four customers whocollectively accounted for approximately 55% of our Healthcare Disposablessegment net sales and 14% of our consolidated net sales during fiscal 2010.Henry Schein accounted for approximately 23% of our segment net sales. The lossof a significant amount of business from any of these four customers or afurther consolidation of such customers could have a material adverse effect onour Healthcare Disposables segment.

 

During fiscal 2010, one customer, DaVita, accounted for approximately33% of the Dialysis segment net sales. The loss of a significant amount ofbusiness from this customer would have a material adverse effect on ourDialysis segment.

 

**Backlog**

 

On September 17, 2010, our consolidated backlog was approximately$14,765,000 compared with approximately $14,954,000 on September 18, 2009.All of the backlog is expected to be recognized as revenue within one year ofsuch date.

 

**Competition**

 

***General***

 

Themarkets in which our business is conducted are highly competitive. Competitionis intense in all of our business segments and includes many large and smallcompetitors. Important competitive factors generally include product design andquality, safety, ease of use, product service and price. We believe that thelong-term competitive position for all of our segments depends principally onour success in developing, manufacturing and marketing innovative,cost-effective products and services.

 

Many of our competitors have greater financial, technical and humanresources than us, are well-established with reputations for success in thesale and service of their products and may have certain other competitiveadvantages over us. However, we believe that the worldwide reputation for thequality and innovation of our products among customers and our reputation forproviding quality product service give us a competitive advantage with respectto many of our products.

 

Inaddition, certain companies have developed or may be expected to develop newtechnologies or products that directly or indirectly compete with our products.We anticipate that we may face increased competition in the future as newinfection prevention and control products and services enter the market.Numerous organizations are believed to be working with a variety oftechnologies and sterilizing agents. In addition, a number of companies havedeveloped or are developing disposable medical instruments and other devicesdesigned to address the risks of infection and contamination. There can be noassurance that new products or services developed by our competitors will notbe more commercially successful than those provided or developed by us in thefuture.

 

***Segments***

 

Informationwith respect to competition within our most significant individual segments isas follows:

 

Webelieve that the ability of our Water Purification and Filtration segment tosuccessfully compete in the water purification, filtration and disinfectantmarket derives from our expertise in an FDA regulated environment, our broadproduct offerings and the high value and quality of our products and services.We are the market leader in the supply of FDA 510(k) cleared waterpurification systems to the dialysis industry in North America. Ouracquisitions of the GE Water business and the Gambro Water business as well asfour smaller geographically oriented acquisitions since May 2006 havegiven us a competitive advantage due to our expanded product offerings and ournational service coverage. We believe that by focusing our efforts principallyon the dialysis, pharmaceutical, biotechnology, medical and commercialindustrial markets, providing a high level of customer service and makingselective acquisitions, we can continue to grow this segment.

 

In our Healthcare Disposables segment, our principal competitors varyby product type, but principally encompass bigger companies that serve larger,non-dental channels such as hospitals and physician offices. Such competitorsinclude  Kimberly-Clark, 3M ESPE,Danaher/Sybron, Dentsply/Sultan Healthcare, Amcor and more generically lessexpensive imported products from Asia. We believe that our long-standing brandreputation in dentistry, product quality, superior customer service and breadthof product line are competitive advantages and are the basis for our success inthis segment.

 

In our Endoscope Reprocessing segment, our principal competitors areSteris, Custom Ultrasonics, Olympus, ASP division of Johnson &Johnson, Metrex, Ruhof and Ecolab. We believe that our principal competitiveadvantages include our 

 

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comprehensive product line of automated endoscope reprocessors, theadvanced features and product innovation of our automated endoscopereprocessors, our reputation for providing high-quality and reliable products,and our highly responsive sales, clinical support and service teams focused onendoscope reprocessing.

 

In our Dialysis segment, our most significant competition comes frommanufacturers of single-use dialyzers, particularly Fresenius, the largestdialysis chain in the United States and a manufacturer of single-use dialyzers.All or substantially all Fresenius dialysis clinics exclusively use single-usedialyzers and therefore have no need for dialyzer reprocessing equipment. See “—ReportingSegments—Dialysis,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

**Researchand Development**

 

Researchand development expenses (which include continuing engineering costs) were$5,169,000 and $4,632,000 in fiscals 2010 and 2009, respectively. The majorityof our research and development expenses related to our endoscope reprocessingproducts, chemistry products, water purification systems and specialtyfiltration filters. The increase in research and development expenses isprimarily due to development work on certain new products in our newly created Chemistriesoperating segment. In fiscal 2011, we intend to further invest in research anddevelopment to leverage our new Chemistry group across various infectionprevention and control opportunities.

 

**Environmental Matters**

 

We anticipate that our compliance withfederal, state and local laws and regulations relating to the discharge ofmaterials into the environment or otherwise relating to the protection of theenvironment, will not have any material effect on our capital expenditures,earnings or competitive position.

 

**Employees**

 

As of September 17, 2010, we employed 883 persons of whom 769 arelocated in the United States, 74 are located in Canada, 18 are located inEurope, Africa and the Middle East, and 22 are located in the Far East. None ofour employees are represented by labor unions. We consider our relations withour employees to be satisfactory.

 

**Financial Information about Geographic Areas**

 

We have operations in Canada,Europe, Asia and other areas outside of the United States. These operations involvethe same business segments as our domestic operations. For a geographicpresentation of revenues and other financial data for the three years ended July 31,2010, see Note 17 to the Consolidated Financial Statements.

 

Ourforeign operations are subject, in varying degrees, to a number of inherentrisks. These risks include, among other items, foreign currency exchange ratefluctuations, changes in local economic conditions and tax regulations,unsettled political, regulatory or business conditions, andgovernment-sponsored boycotts and tariffs on our products or services.

 

Dependingon the direction of change relative to the U.S. dollar, foreign currencyexchange rate fluctuations can increase or reduce the reported dollar amountsof the Company’s net assets and results of operations. Overall, net incomeduring fiscal 2010 was adversely impacted as a result of foreign currencymovements relative to the U.S. dollar. See “Risk Factors” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.” We cannot predict future changesin foreign currency exchange rates or the effect they will have on ouroperations.

 

**AvailableInformation**

 

We make available to the public, free of charge, on or through theInvestor Relations section of our internet website, copies of our annualreports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K and amendments to those reports as soon as reasonablypracticable after we electronically file such materials with the SEC. Ourfilings are available to the public from commercial document retrievalservices, our website and at the SEC’s website at www.sec.gov. Our websiteaddress is www.cantelmedical.com. Also available on our website are ourCorporate Governance Guidelines, Charters of the Nominating and GovernanceCommittee, Compensation Committee and Audit Committee, and Code of BusinessConduct and Ethics. Information contained on our website is not incorporated byreference into this Report.

 

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**Item 1A.                 RISK FACTORS.**

 

*We are subject to various risks and uncertainties relating to orarising out of the nature of our businesses and general business, economic,financing, legal and other factors or conditions that may affect us. We providethe following cautionary discussion of risks and uncertainties relevant to ourbusinesses, which we believe are factors that, individually or in theaggregate, could have a material and adverse impact on our business, results ofoperations and financial condition, or could cause our actual results to differmaterially from expected or historical results. We note these factors forinvestors as permitted by the Private Securities Litigation Reform Act of 1995.You should understand that it is not possible to predict or identify all suchfactors. Consequently, you should not consider the following to be a completediscussion of all potential risks or uncertainties.*

 

***Our market for dialysis reprocessing products is limited to dialysiscenters that reuse dialyzers, which market has been decreasing in the UnitedStates.***

 

Ourdialyzer reprocessing products are limited to use by centers that choose toclean, sterilize and reuse dialyzers, rather than discard the dialyzers after asingle use. Dialysis centers in the United States that reuse dialyzers derivean economic benefit since the per-procedure cost is less when utilizingdialyzer reuse compared with single-use and such dialysis clinics generallyreceive a capitated payment for providing hemodialysis treatment. Althoughcurrent public information is not available to accurately quantify the numberof dialysis centers currently employing dialyzer reuse versus single-use, it isapparent that the market share of single-use dialyzers has been increasing duringthe past decade relative to reuse dialyzers. We believe that approximatelyone-third of all dialysis procedures in the United States currently reusedialyzers.

 

Allor substantially all dialysis clinics owned by Fresenius, the largest dialysischain in the United States and a manufacturer of single-use dialyzers, aresingle-use facilities. We believe that dialysis clinics owned by DaVita, thesecond largest dialysis chain in the United States, performed approximatelyfifty to sixty percent of its dialysis procedures using reuse.

 

TheCompany believes that if the per-procedure cost of single-use relative to reusedecreases to a level that makes it more economical to switch from reuse tosingle use, then all or a substantial number of our customers may elect to makesuch switch. The loss of any of our major customers due to such economics orany other reason would have a material adverse effect on our business. See “Business- Principal Customers,” “Business - Competition” and “Management’s Discussionand Analysis of Financial Condition and Results of Operations—Results ofOperations.”

 

Netsales of our Dialysis segment accounted for 16.3% of our total net sales infiscal 2010 compared with 21.7% of net sales in fiscal 2009 and 24.1% of netsales in fiscal 2008. We believe this downward trend is likely to continueduring fiscal 2011. Our Dialysis segment accounted for 24.5%, 29.6% and 32.9%of our total reporting segments operating income (before general corporateexpenses and interest expense) in fiscals 2010, 2009 and 2008, respectively.

 

***Industry consolidation and the highly competitivemarket has resulted in the loss of dialysate concentrate sales.***

 

Thedownward trend of sales of our dialysate concentrate business continued duringfiscal 2010. Fresenius manufactures dialysate concentrate itself and thereforeprovides dialysate concentrate to its own dialysis clinics. DaVita and certaininternational customers have also continued their reduction of dialysateconcentrate purchases from us as a result of the highly competitive and pricesensitive market for such product.

 

***Because a significant portion of our WaterPurification and Filtration, Dialysis and Healthcare Disposables segments netsales comes from a few large customers, any significant decrease in sales tothese customers, due to industry consolidation or otherwise, could harm ouroperating results.***

 

In our Water Purification and Filtration segment, one customer,Fresenius, accounted for approximately 24% of our fiscal 2010 net sales.Additionally, as a result of the Gambro Acquisition, on a pro forma basis twocustomers (Fresenius and DaVita) would have collectively accounted forapproximately 44% of our annual net sales in our Water Purification andFiltration segment. The loss of a significant amount of business from either ofthese two customers could have a material adverse effect on our WaterPurification and Filtration segment.

 

During fiscal 2010, DaVita accounted for approximately 33% of theDialysis segment net sales. We are highly dependent on DaVita as a customer andany shift by this customer away from reuse would have a material adverse effecton our Dialysis segment net sales.

 

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Thedistribution network in the United States dental industry is concentrated, withrelatively few distributors of consumables accounting for a significant shareof the sales volume to dentists. Accordingly, net sales and profitability ofour Healthcare Disposables segment are highly dependent on our relationshipswith a limited number of large distributors. During fiscal 2010, the top fourcustomers of our Healthcare Disposables segment accounted for approximately 55%of its net sales.  The loss or asignificant reduction of business from any of the major customers of theHealthcare Disposables segment could adversely affect our results ofoperations. In addition, because our Healthcare Disposables segment productsare primarily sold through third-party distributors and not directly to endusers, we cannot control the amount and timing of resources that ourdistributors devote to our products.

 

Thereis no assurance that there will not be a loss or reduction in business from oneor more of our major customers. In addition, we cannot assure that net salesfrom customers that have accounted for significant net sales in the past,either individually or as a group, will reach or exceed historical levels inany future period.

 

***Demand for some of our healthcare disposables products can besignificantly affected by the severity of flu outbreaks, such as the novel H1N1flu, and the level of urgency our customers and the general public develop andmaintain with respect to epidemic and pandemic preparedness.***

 

Net sales of high margin face masks, disinfectantsand other healthcare disposables products were strong in our fourth quarter offiscal 2009, and first four months of fiscal 2010, due to the outbreak of thenovel H1N1 flu (swine flu). Although the outbreak of the novel H1N1 fluresulted in strong sales volume of high margin face masks and other healthcaredisposables products, such sales volume has returned to a sales level that issimilar to that which existed prior to the outbreak of the novel H1N1 flu giventhat the elevated level of reported cases of influenza viruses has subsided.Atypical demand for face masks is highly dependent upon the severity and timingof any pandemic flu outbreak such as the recent novel H1N1 flu, the ability ofour Company to educate existing customers and potential new customers on thebenefits of our face masks, disinfectants and other products and the level ofurgency our customers and the general public develop and maintain with respectto epidemic and pandemic preparedness. Accordingly, we cannot provide assurancethat a similar high level of sales as those that occurred in our fourth quarter of fiscal 2009 andfirst four months of fiscal 2010 will occur in any future period.

 

***Our businesses are adversely impacted by rising fuel and oil prices andare heavily reliant on certain raw materials.***

 

We purchase raw materials, sub-assemblies, components and othersupplies essential to our operations from numerous suppliers in the UnitedStates and abroad. The principal raw materials that we use to conductoperations include chemicals, paper pulp, resin, stainless steel and plasticcomponents.

 

Fromtime to time we experience price increases for raw materials, with no guaranteethat such increases can be passed along to our customers. During fiscal 2008,we experienced unprecedented price increases in certain raw materials due inlarge part to the rising price of fuel and oil, including chemicals, paper pulpand plastics (resins and bottles) which had a significant adverse impact on ourgross margins. In addition, we experienced significant difficulty in obtainingcertain chemicals in fiscal 2008 due to apparent shortages by certainsuppliers. Although prices and raw material availability normalized duringfiscal 2009 and we do not currently foresee extraordinary difficulty inobtaining the materials, sub-assemblies, components or other supplies necessaryfor our business operations, we cannot predict if similar difficulties willoccur in the future, including further price increases, that may adverselyaffect our business.

 

Inaddition, rising fuel and oil prices can also have a significant adverse impacton transportation costs related to both the purchasing and delivery ofproducts.

 

Althoughthe cost of certain raw materials and distribution costs decreased duringfiscal 2009 and a portion of fiscal 2010, due in large part to the decreasingprice of fuel and oil, certain raw material costs have risen in recent months.If costs materially increase in the future, we may not be able to implementprice increases to our customers, which would adversely impact our grossmargins.

 

***The acquisition of new businesses and product lines, which has inherentrisks, is an important part of our growth strategy.***

 

Weintend to grow, in part, by acquiring businesses. The success of this strategydepends upon several factors, including our ability to:

 

·                  identify andacquire businesses;

·                  obtainfinancing for acquisitions on terms that are favorable or acceptable;

 

17

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·                  integrateacquired operations, personnel, products and technologies into our organizationeffectively;

·                  retain andmotivate key personnel and retain the customers of acquired companies; and

·                  successfullypromote and increase sales and profits of acquired product lines.

 

Inaddition, even if acceptable financing is obtained, such financing may resultin significant charges associated with the potential write-off of existingdeferred financing costs.

 

OnAugust 1, 2009, we adopted Accounting Standards Codification (“ASC”) 805, “*Business Combinations,*” (“ASC 805”), whichestablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, contingent future consideration, any non-controllinginterest in the acquiree and the goodwill acquired. The provisions of this newaccounting pronouncement may make it more difficult for us to identifyacquisitions that meet all of our financial strategic objectives. Additionally,the new provisions of ASC 805 relating to contingent future consideration, or earn-outs,require us to record the fair value of such estimated amounts at the date ofacquisition and continually remeasure the liability at each balance sheet date,which has the potential for creating significant earnings volatility shouldearnouts be used in our future acquisitions.

 

Inaddition, we have occasionally used our stock as partial consideration foracquisitions. Our common stock may not remain at a price at which it can beused as consideration for acquisitions without diluting our existing stockholders,and potential acquisition candidates may not view our stock attractively. Wealso may not be able to sustain the rates of growth that we have experienced inthe past, whether by acquiring businesses or otherwise.

 

Wehave a significant amount of goodwill and intangible assets on our balancesheet related to acquisitions. If future operating results of the acquiredbusiness are significantly less than the results anticipated at the time of theacquisition, we may be required to incur impairment charges.****At July 31, 2010, the average fairvalue of all of our reporting units exceeded book value by substantial amounts,except our Specialty Packaging segment, which had an average fair value thatexceeded book value by approximately 16%.

 

***Competition from manufacturing facilities located in China andSoutheast Asia could result in a reduction in our net sales of healthcaredisposable products due to reduced average selling prices or our customers nolonger purchasing certain products from us.***

 

Despite expensive shipping costs, some of ourcompetitors manufacture certain healthcare disposable products in China andSoutheast Asia due to lower overall costs in certain parts of that region ofthe world. Although we believe the quality of our healthcare disposableproducts, which are produced in the United States, are superior, our sales inthe future may be adversely affected by either loss of sales or reductions inthe price of our products as a result of this low cost competition. In ourHealthcare Disposables segment, we expect to experience significant pricingpressure that will adversely affect our gross profit in fiscal 2011 in ourHealthcare Disposables segment as a result of low cost competition in China andSoutheast Asia.

 

***We are subject to extensive government regulation. Governmentregulation may delay or prevent new product introduction.***

 

Manyof our products are subject to regulation by governmental and private agenciesin the United States and abroad, which regulate the testing, manufacturing, storage,packaging, labeling, distribution and marketing of medical supplies anddevices. Certain international regulatory bodies also impose importrestrictions, tariff regulations, duties and tax requirements. Delays in agencyreview can significantly delay new product introduction and may result in aproduct becoming “dated” or losing its market opportunity before it can beintroduced. The FDA and other agency clearances generally are required beforewe can market new products in the United States or make significant changes toexisting products. The FDA also has the authority to require a recall ormodification of products in the event of a defect. The process of obtainingmarketing clearances and approvals from regulatory agencies for new productscan be time consuming and expensive. There is no assurance that clearances orapprovals will be granted or that agency review will not involve delays thatwould adversely affect our ability to commercialize our products.

 

Duringthe past several years, the FDA, in accordance with its standard practice, hasconducted a number of inspections of our manufacturing facilities to ensurecompliance with regulatory standards relating to our testing, manufacturing,storage and packaging of products. On occasion, following an inspection, theFDA has called our attention to certain “Good Manufacturing Practices”compliance deficiencies. Failure to adequately correct violations or otherwisecomply with requests made by the FDA can result in regulatory action beinginitiated by the FDA including seizure, injunction and civil monetarypenalties.

 

18

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Federal,state and foreign regulations regarding the manufacture and sale of ourproducts are subject to change. We cannot predict what impact, if any, suchchanges might have on our business. In addition, there can be no assurance thatregulation of our products will not become more restrictive in the future andthat any such development would not have a material adverse effect on our business.For a more detailed discussion on government regulation and related risks, see “Business- Government Regulation.”

 

***Currency fluctuations and trade barriers could adversely affect ourresults of operations.***

 

Aportion of our products in all of our business segments are exported to andimported from a variety of geographic locations, and our business could bematerially and adversely affected by the imposition of trade barriers,fluctuations in the rates of exchange of various currencies, tariff increasesand import and export restrictions, affecting all of such geographies includingbut not limited to the United States, Canada, the European Union, the UnitedKingdom and the Far East.

 

OurCanadian subsidiaries purchase a portion of their inventories and incurexpenses in United States dollars and sell a significant amount of theirproducts in United States dollars. Our United States subsidiaries also sell aportion of their products in euros and British pounds. Therefore, we areexposed to foreign exchange gains and losses upon settlement of such items.Similarly, our foreign subsidiaries’ United States denominated assets andliabilities must be converted into their functional currency when preparingtheir financial statements, which results in foreign exchange gains and losses.Additionally, the results of operations of our foreign subsidiaries aretranslated from their functional currency to United States dollars for purposesof preparing our Consolidated Financial Statements. Therefore, the results ofour operations could be materially and adversely affected by fluctuations inthe value of the Canadian dollar, euro and British pound against the UnitedStates dollar.

 

***Customer acceptance of our products is dependent on our ability to meetchanging requirements.***

 

Customeracceptance of our products is significantly dependent on our ability to offerproducts that meet the changing requirements of our customers, includinghospitals, industrial laboratories, doctors, dentists, clinics, governmentagencies and industrial corporations. Any decrease in the level of customeracceptance of our products could have a material adverse effect on ourbusiness.

 

***We distribute our products in highly competitive markets.***

 

Wedistribute substantially all of our products in highly competitive markets thatcontain many products available from nationally and internationally recognizedcompetitors. Many of these competitors have significantly greater financial,technical and human resources than us and are well-established. In addition,some companies have developed or may be expected to develop technologies orproducts that could compete with the products we manufacture and distribute orthat would render our products obsolete or noncompetitive. In addition, ourcompetitors may achieve patent protection, regulatory approval or productcommercialization that would limit our ability to compete with them. Althoughwe believe that we compete effectively with all of our present competitors inour principal product groups, there can be no assurance that we will continueto do so. These and other competitive pressures could have a material adverseeffect on our business. See “Business — Competition.”

 

***Deterioration in the economy and credit markets may adversely affectour future results of operations.***

 

Our business has been and may continue to beadversely affected by the deterioration in the general economy and creditmarkets by potentially causing our customers to slow spending on our products,especially capital equipment. Sales of capital equipment representedapproximately 25% of our fiscal 2010 consolidated net sales and are primarilyincluded in our Water Purification and Filtration, Dialysis and EndoscopeReprocessing segments.

 

***Because we operate in international markets, we are subject topolitical and economic risks that we do not face in the United States.***

 

Weoperate in a global market. Global operations are subject to risks, includingpolitical and economic instability, general economic conditions, imposition ofgovernment controls, the need to comply with a wide variety of foreign andUnited States export laws, trade restrictions and the greater difficulty ofadministering business overseas.

 

19

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***The markets for many of our products are subject to changingtechnology.***

 

Themarkets for many products we sell, such as endoscope reprocessing and waterpurification equipment, are subject to changing technology, new productintroductions and product enhancements, and evolving industry standards. Theintroduction or enhancement of products embodying new technology or theemergence of new industry standards could render existing products obsolete orresult in short product life cycles. Accordingly, our ability to compete is inpart dependent on our ability to continually offer enhanced and improvedproducts.

 

***We may be exposed to product liability claims resulting from the use ofproducts we sell and distribute.***

 

Wemay be exposed to product liability claims resulting from the products we selland distribute. We maintain general liability insurance that includes productliability coverage, which we believe is adequate for our businesses. However,there can be no assurance that insurance coverage for these risks will continueto be available or, if available, that it will be sufficient to cover potentialclaims or that the present level of coverage will continue to be available at areasonable cost. A partially or completely uninsured successful claim againstus could have a material adverse effect on us.

 

***We use chemicals and other regulated substances in the manufacturing ofour products.***

 

Inthe ordinary course of certain of our manufacturing processes, we use variouschemicals and other regulated substances. Although we are not aware of anymaterial claims involving violation of environmental or occupational health andsafety laws or regulations, there can be no assurance that such a claim may notarise in the future, which could have a material adverse effect on us.

 

***We rely on intellectual property and proprietary rights to maintain ourcompetitive position.***

 

Werely heavily on proprietary technology that we protect primarily throughlicensing arrangements, patents, trade secrets and proprietary know-how. Therecan be no assurance that any pending or future patent applications will begranted or that any current or future patents, regardless of whether we are anowner or a licensee of the patent, will not be challenged, renderedunenforceable, invalidated or circumvented or that the rights will provide acompetitive advantage to us. There can also be no assurance that our tradesecrets or non-disclosure agreements will provide meaningful protection of ourproprietary information. There can also be no assurance that others will notindependently develop similar technologies or duplicate any technologydeveloped by us or that our technology will not infringe upon patents or otherrights owned by others.

 

***If we are unable to retain key personnel, our business could beadversely affected.***

 

Oursuccess is dependent to a significant degree upon the efforts of key members ofour management. Although none of our key executives has an employment agreementwith the Company, during fiscal 2010, we adopted short and long term incentiveplans for our key executives, including our division CEOs, and entered intoseverance agreements with these executives. Such short and long term incentiveplans are designed in part to have a retentive effect on the executives.However, there can be no assurance that the terms of the new plans or theseverance agreements will have such an effect. We believe the loss orunavailability of any of such individuals could have a material adverse effecton our business. In addition, our success depends in large part on our abilityto attract and retain highly qualified scientific, technical, sales, marketingand other personnel. Competition for such personnel is intense and there can beno assurance that we will be able to attract and retain the personnel necessaryfor the development and operation of our businesses.

 

***Our stock price has been volatile and mayexperience continued significant price and volume fluctuations in the futurethat could reduce the value of outstanding shares.***

 

The market for our common stock has, from time to time, experiencedsignificant price and volume fluctuations that may have been unrelated to ouroperating performance. Factors such as announcements of our quarterly financialresults and new business developments could also cause the market price of ourcommon stock to fluctuate significantly.

 

***Modifications to our revolving credit facility in fiscal 2011 mayresult in less favorable terms.***

 

OurUnited States credit facilities have a termination date of August 1,2011. Although we may repay a portion of our outstanding borrowings underthe revolver throughout fiscal 2011, we do not presently anticipate paying offthe revolver in full by its termination date. We are in discussions with ourbank syndicate regarding modifications to such facility, including an extensionof the termination date, and expect to formally modify the facility before itsexpiration. However, no 

 

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assurancecan be made that we will be successful in modifying the facilities before itsexpiration or on similar terms as currently in effect.

 

***We may face significant uncertainty in the industry due to governmenthealthcare reform.***

 

Thehealthcare industry in the United States is subject to fundamental changes dueto the ongoing healthcare reform and the related political, economic andregulatory influences. In March 2010, comprehensive healthcare reformlegislation was signed into law in the United States through the passage of thePatient Protection and Affordable Health Care Act and the Health Care andEducation Reconciliation Act. Among other initiatives, the legislation providesfor a 2.3% annual excise tax on the sales of certain medical devices in theUnited States commencing in January 2013. We manufacture and sell devicesthat will likely be subject to this tax, which could adversely affect ouroperating expenses and results of operations. In addition, various healthcarereform proposals have also emerged at the state level. We cannot predict withcertainty what healthcare initiatives, if any, will be implemented at the statelevel, or what the ultimate effect of federal healthcare reform or any futurelegislation or regulation may have on us or on our customers’ purchasingdecisions regarding our products and services.

 

**Item 1B.                 UNRESOLVEDSTAFF COMMENTS.**

 

None

 

**Item 2.                    PROPERTIES.**

 

**Owned Facilities**

 

We own three buildings located on adjacent sites, comprising a total of16.5 acres of land in Plymouth, a suburb of Minneapolis, Minnesota. Theprincipal facility is a 110,000 square-foot building used for executive,administrative and sales staff, research operations, manufacturing andwarehousing. The second facility is a 65,000 square-foot building used formanufacturing and warehousing. The third facility is a 43,000 square-foot buildingused for manufacturing, warehousing and administrative and sales staff. Thesefacilities are used for our Dialysis, Endoscope Reprocessing, TherapeuticFiltration and Chemistries operating segments, as well as a portion of ourWater Purification and Filtration operating segment.

 

We own a 63,000 square-foot building in Hauppauge, New York, theheadquarters for our Crosstex subsidiary, which is used for executive,administrative and sales staff, manufacturing and warehousing for ourHealthcare Disposables operating segment.

 

As a result of the acquisition of G.E.M. on July 31, 2009, we owna 13,825 square-foot building in Buena Park, California, which serves as ourwest coast warehouse and regeneration plant for our Water Purification andFiltration segment.

 

**Leased Facilities**

 

Our principal leased facilities include the following:

 
| **Location**                  | ** ** | **Purpose**                                                                                 | ** ** | **Square Footage** | ** ** | **Principal Operating  Segment** |
|-------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------|
| Middletown,  PA               |       | Warehouse  and distribution hub                                                             |       | 31,000                  |       | Dialysis                              |
| Plymouth,  MN                 |       | Warehousing                                                                                 |       | 44,000                  |       | Various                               |
| Hauppauge,  NY                |       | Warehousing                                                                                 |       | 46,000                  |       | Healthcare  Disposables               |
| Sharon,  PA                   |       | Manufacturing  and warehousing                                                              |       | 52,000                  |       | Healthcare  Disposables               |
| Santa  Fe Springs, CA         |       | Manufacturing  and warehousing                                                              |       | 35,000                  |       | Healthcare  Disposables               |
| Lawrenceville,  GA            |       | Manufacturing  and warehousing                                                              |       | 40,000                  |       | Healthcare  Disposables               |
| Burlington,  Ontario          |       | Sales  and administrative offices, research and engineering, manufacturing and  warehousing |       | 21,600                  |       | Water  Purification and Filtration    |
| Skippack,  PA                 |       | Sales  and administrative offices, manufacturing, warehousing and regeneration plant        |       | 22,500                  |       | Water  Purification and Filtration    |
| Heerlan,  the Netherlands (1) |       | Sales  and service offices, warehouse and distribution hub                                  |       | 21,000                  |       | Various                               |

 

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| Lowell,  MA (2)    |   | Sales  and administrative offices, manufacturing, warehousing and regeneration plant |   | 26,000 |   | Water  Purification and Filtration                             |
|--------------------|--------|--------------------------------------------------------------------------------------|--------|--------|--------|----------------------------------------------------------------|
| San  Antonio, TX   |   | Sales,  service, storage and regeneration plant                                      |   | 8,900  |   | Water  Purification and Filtration                             |
| Edmonton,  Alberta |   | Executive,  sales and administrative offices, manufacturing and warehousing          |   | 11,700 |   | Specialty  Packaging (Included in All Other reporting segment) |
| Little  Falls, NJ  |   | Corporate  executive offices                                                         |   | 8,900  |   | Cantel  Medical Corp.                                          |

 

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(1) Aspart of the restructuring plan of our Netherlands subsidiary as furtherdescribed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and Note 18 to the Consolidated Financial Statements, wesold our building and land in Heerlan, the Netherlands on May 19, 2009 andentered into a lease for 2.5 years with the new owner so we can continue to usethe facility as our European sales and service headquarters as well as forwarehouse and distribution activity. The sale of the building and land resultedin a gain of $146,000, which is being amortized over the life of the lease andis recorded in deferred revenue and other long-term liabilities. The rent forthe full 2.5 year lease of $325,000 was paid from the sale proceeds andrecorded as a prepaid expense in the Consolidated Financial Statements.

 

(2) Thefacility in Lowell is leased from a company that is affiliated with an employeeof Mar Cor.

 

In addition, we lease office and sales space in Tokyo, Japan;Singapore; and Beijing, China that is used for all of our operating segmentsother than Healthcare Disposables, Specialty Packaging and Chemistries. Welease office, sales and warehouse space in Lienden, the Netherlands for ourHealthcare Disposables segment.

 

We lease additional space for our Water Purification and Filtrationsegment in Downers Grove, Illinois; Norcross, Georgia; Mount Jackson,Virginia; Goshen, New York; Orion Township, Michigan; North Royalton, Ohio;Durham, North Carolina; Smyrna, Tennessee; Carrollton, Texas; Auburn, Washington;Lakeland, Florida; Pittsburgh, Pennsylvania; Concord, California; Toronto,Ontario; and Montreal, Quebec. The Downers Grove, Norcross, Toronto andMontreal facilities serve as warehouses and regeneration plants, while theother locations are small storage facilities supporting local serviceoperations.

 

We also lease additional space for our Specialty Packaging segment inGlen Burnie, Maryland that is used for sales and marketing, warehousing and asa distribution hub.

 

Net rentals for leased space for fiscal 2010 aggregated approximately$2,995,000 compared with $2,815,000 in fiscal 2009.

 

**Item 3.                    LEGALPROCEEDINGS.**

 

In the normal course of business, we are subject to pending andthreatened legal actions. It is our policy to accrue for amounts related tothese legal matters if it is probable that a liability has been incurred and anamount of anticipated exposure can be reasonably estimated. We do not believethat any of these pending claims or legal actions will have a material effecton our business, financial condition, results of operations or cash flows.

 

**Item 4.                    RESERVED.**

 

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**PART II**

 

**Item 5.****                                                          ****MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES****.**

 

Our Common Stock trades on the New York Stock Exchange under the symbol“CMN.”

 

The following table sets forth, for the periods indicated, the high andlow closing prices for the Common Stock as reported by the New York StockExchange.

 
| ** **                        | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|-----------------------------------|------------|----------|------------|---------|------------|
|                              |       |     |       |    |       |
| **Year Ended July 31, 2010** |       |     |       |    |       |
| First Quarter                     |       | $        | 17.97      |    | $          | 13.26 |   |
| Second Quarter                    |       | 21.27    |       | 16.14   |       |
| Third Quarter                     |       | 21.48    |       | 18.45   |       |
| Fourth Quarter                    |       | 20.61    |       | 15.20   |       |
|                              |       |     |       |    |       |
| **Year Ended July 31, 2009** |       |     |       |    |       |
| First Quarter                     |       | $        | 10.75      |    | $          | 8.18 |   |
| Second Quarter                    |       | 15.33    |       | 7.57    |       |
| Third Quarter                     |       | 15.44    |       | 11.53   |       |
| Fourth Quarter                    |       | 16.84    |       | 12.51   |       |

 

In December 2009, we announced that we intend to pay, for thefirst time, a semiannual cash dividend of $0.05 per outstanding share, or $0.10per share annually, of the Company’s Common Stock. The first cash dividend of$0.05 per share of outstanding Common Stock, which totaled $840,000, was paidon January 29, 2010 to shareholders of record at the close of business on January 15,2010. The second cash dividend of $0.05 per share of outstanding Common Stock,which totaled $843,000, was paid on July 30, 2010 to shareholders ofrecord at the close of business on July 15, 2010. Future declaration ofdividends and the establishment of future record and payment dates are subjectto the final determination of the Company’s Board of Directors. We are notpermitted to pay cash dividends on our Common Stock in excess of $3,000,000without the consent of our lenders.

 

On September 17, 2010, the closing price of our Common Stock was$15.56 and we had 334 record holders of Common Stock. A number of such holdersof record are brokers and other institutions holding shares of Common Stock in “streetname” for more than one beneficial owner.

 

The following table represents information with respect to purchases ofCommon Stock made by the Company during the fourth quarter of fiscal 2010:

 
| ** **   | ** ** | ** **                    | ** ** | ** **                   | ** ** | **Total number of shares** | ** ** | **Maximum number of**        | ** ** |
|--------------|------------|-------------------------------|------------|------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| **Month**    | ** ** | ** **                    | ** ** | ** **                   | ** ** | **purchased as part of**   | ** ** | **shares that may yet** | ** ** |
| **of**       | ** ** | **Total number of** | ** ** | **Average price**       | ** ** | **publicly announced**               | ** ** | **be purchased under**       | ** ** |
| **Purchase** | ** ** | **shares purchased**     | ** ** | **paid per share** | ** ** | **plans or programs**           | ** ** | **the program**                   | ** ** |
|         |       |                          |       |                         |       |                                      |       |                                   |       |
| May          |       | 7,334                         |       | $                            | 18.59      |                                      | —     |                                   | —     |   |
| June         |       | —                        |       | —                       |       | —                                    |       | —                                 |       |
| July         |       | —                        |       | —                       |       | —                                    |       | —                                 |       |
| Total        |       | 7,334                         |       | $                            | 18.59      |                                      | —     |                                   | —     |   |

 

The Company does not currently have a publicly announced stockrepurchase program. All of the shares purchased during the fourth quarter offiscal 2010 represent shares surrendered to the Company to pay employeewithholding taxes due upon the vesting of restricted stock or the exercise ofstock options that do not qualify as incentive stock options.

 

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**Stock Performance Graph**

 

The following graph compares the cumulative total stockholder return onour Common Stock for the last five fiscal years with the cumulative totalreturns of the Russell 2000 index and the Dow Jones US Health Care Equipment &Services index over the same period (assuming an investment of $100 in ourCommon Stock and in each of the indexes on July 31, 2005, and whereapplicable, the reinvestment of all dividends).

 

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among Cantel Medical Corp., the Russell 2000 Indexand the Dow Jones US Health Care Equipment & Services Index

 

 

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*$100invested on 7/31/05 in stock or index, including reinvestment of dividends. 

Fiscalyear ending July 31.

 

Copyright©2010 Dow Jones & Co. All rights reserved.

 

*The stock price*performance*included in**this**graph is not necessarilyindicative of future stock price performance.*

 

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**Item 6.                    SELECTEDCONSOLIDATED FINANCIAL DATA.**

 

The financial data in the following table are qualified in its entiretyby, and should be read in conjunction with, the financial statements and notesthereto and other information incorporated by reference in this Form 10-K.Gambro Water was acquired during fiscal 2011 and therefore is excluded for allperiods presented. Purity is reflected in the Consolidated Statements of IncomeData for the portion of fiscal 2010 subsequent to its acquisition on June 1,2010. G.E.M. was acquired on the last day of fiscal 2009 and therefore isincluded in the Consolidated Statements of Income Data for fiscal 2010 (but thenet assets of G.E.M. are included in the Consolidated Balance Sheet Data as of July 31,2009.) The acquired operations of Dialysis Services, Inc. (“DSI”),Verimetrix, LLC (“Verimetrix”)  andStrong Dental Products, Inc. (“Strong Dental”) are reflected in theConsolidated Statements of Income Data for fiscals 2010 and 2009 and theportion of fiscal 2008 subsequent to their acquisitions on August 1, 2007,September 17, 2007 and September 26, 2007, respectively. The acquiredoperations of GE Water and Twist 2 It Inc. (“Twist”)  are reflected in the Consolidated Statementsof Income Data for fiscals 2010, 2009 and 2008 and the portion of fiscal 2007subsequent to their acquisitions on March 30, 2007 and July 9, 2007,respectively. Purity, G.E.M., DSI, Verimetrix, Strong Dental, GE Water andTwist, are not reflected in the results of operations for all other periodspresented. Since the Olympus distribution agreements with Carsen Group Inc. (“Carsen”),as well as Carsen’s active business operations, terminated on July 31,2006, Carsen is reflected as a discontinued operation for all years presented.

 

**Consolidated Statements of Income Data**

(Amountsin thousands, except per share data)

 
| ** **                                                                                                                           | ** ** | **Year Ended July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Net  sales                                                                                                                           |       | $                                      | 273,952    |   | $ | 260,050 |   | $ | 249,374 |   | $ | 219,044 |   | $ | 192,179 |   |
| Cost  of sales                                                                                                                       |       | 162,981                                |       | 160,571 |   | 161,748 |   | 140,032 |   | 122,963 |   |
| Gross  profit                                                                                                                        |       | 110,971                                |       | 99,479 |   | 87,626 |   | 79,012 |   | 69,216 |   |
|                                                                                                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Income  from continuing operations before interest expense and income taxes                                                          |       | 32,665                                 |       | 27,451 |   | 17,967 |   | 16,839 |   | 15,344 |   |
| Interest  expense, net                                                                                                               |       | 1,110                                  |       | 2,495 |   | 4,116 |   | 2,737 |   | 3,393 |   |
| Income  from continuing operations before income taxes                                                                               |       | 31,555                                 |       | 24,956 |   | 13,851 |   | 14,102 |   | 11,951 |   |
| Income  taxes                                                                                                                        |       | 11,614                                 |       | 9,387 |   | 5,158 |   | 5,998 |   | 5,298 |   |
| Income  from continuing operations                                                                                                   |       | 19,941                                 |       | 15,569 |   | 8,693 |   | 8,104 |   | 6,653 |   |
| Income  from discontinued operations, net of tax                                                                                     |       | —                                 |       | — |   | — |   | 342 |   | 10,268 |   |
| Gain  on disposal of discontinued operations, net of tax                                                                             |       | —                                 |       | — |   | — |   | — |   | 6,776 |   |
| Net  income                                                                                                                          |       | $                                      | 19,941     |   | $ | 15,569 |   | $ | 8,693 |   | $ | 8,446 |   | $ | 23,697 |   |
|                                                                                                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Earnings  per common share:                                                                                                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Basic:  (1)                                                                                                                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                                                                                               |       | $                                      | 1.19       |   | $ | 0.94 |   | $ | 0.53 |   | $ | 0.52 |   | $ | 0.43 |   |
| Discontinued  operations                                                                                                             |       | —                                 |       | — |   | — |   | 0.02 |   | 0.66 |   |
| Gain  on disposal of discontinued operations                                                                                         |       | —                                 |       | — |   | — |   | — |   | 0.44 |   |
| Net  income                                                                                                                          |       | $                                      | 1.19       |   | $ | 0.94 |   | $ | 0.53 |   | $ | 0.54 |   | $ | 1.53 |   |
|                                                                                                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Diluted:  (1)                                                                                                                        |       |                                   |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                                                                                               |       | $                                      | 1.18       |   | $ | 0.94 |   | $ | 0.53 |   | $ | 0.50 |   | $ | 0.41 |   |
| Discontinued  operations                                                                                                             |       | —                                 |       | — |   | — |   | 0.02 |   | 0.63 |   |
| Gain  on disposal of discontinued operations                                                                                         |       | —                                 |       | — |   | — |   | — |   | 0.42 |   |
| Net  income                                                                                                                          |       | $                                      | 1.18       |   | $ | 0.94 |   | $ | 0.53 |   | $ | 0.52 |   | $ | 1.46 |   |
|                                                                                                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Dividends  per common share                                                                                                          |       | $                                      | 0.10       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                                                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Weighted  average number of shares and common stock equivalents attributable to both  common stock and participating securities: (1) |       |                                   |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                |       | 16,777                                 |       | 16,519 |   | 16,276 |   | 15,711 |   | 15,471 |   |
| Diluted                                                                                                                              |       | 16,968                                 |       | 16,576 |   | 16,440 |   | 16,173 |   | 16,276 |   |

 

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** **

**ConsolidatedBalance Sheets Data**

(Amounts in thousands, except per share data)

 
| ** **                              | ** ** | **July 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2010**          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |              |       |   |   |   |   |   |   |   |   |
| Total assets                            |       | $                 | 280,665    |   | $277,871 |   | $ | 279,190 |   | $ | 263,671 |   | $ | 238,227 |   |
| Current assets                          |       | 94,731            |       | 88,910 |   | 84,561 |   | 76,731 |   | 82,448 |   |
| Current liabilities                     |       | 40,984            |       | 39,113 |   | 38,922 |   | 35,971 |   | 39,097 |   |
| Working capital                         |       | 53,747            |       | 49,797 |   | 45,639 |   | 40,760 |   | 43,351 |   |
| Long-term debt                          |       | 11,000            |       | 33,300 |   | 50,300 |   | 51,000 |   | 34,000 |   |
| Stockholders’ equity               |       | 209,405           |       | 187,116 |   | 168,712 |   | 155,070 |   | 140,805 |   |
| Book value per outstanding common share |       | $                 | 12.42      |   | $11.24 |   | $ | 10.31 |   | $ | 9.62 |   | $ | 9.14 |   |
| Common shares outstanding               |       | 16,866            |       | 16,644 |   | 16,371 |   | 16,116 |   | 15,399 |   |

 

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(1)                                  Per share and share amountshave been adjusted retrospectively to conform to the provisions of ASC260-10-45, “*Earnings Per Share — OtherPresentation Matters,”*(“ASC260-10-45”).  In June 2008,the Financial Accounting Standards Board (“FASB”) issued ASC 260-10-45, which provides that unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andshall be included in the computation of earnings per share (“EPS”) pursuant tothe two-class method, a change that reduces both basic and dilutedEPS. Our participating securities consist solely of unvested restrictedstock awards, which have contractual participation rights equivalent to thoseof stockholders of unrestricted common stock. The two-class method of computingearnings per share is an allocation method that calculates earnings per sharefor common stock and participating securities. Previously, we excluded unvestedrestricted stock awards in the calculation of basic EPS and included suchawards in diluted EPS under the treasury stock method. ASC 260-10-45 waseffective for fiscal years beginning after December 15, 2008 and thereforewas adopted on August 1, 2009. All prior period EPS data presented havebeen adjusted retrospectively to conform to the provisions of ASC260-10-45. In fiscals 2009 and 2008, such retrospective application causedan insignificant increase in the denominator of our weighted average sharescalculation, which decreased previously reported basic EPS in fiscals 2009 and2008 from $0.96 to $0.94 and $0.54 to $0.53, respectively, but had no impact onpreviously reported diluted EPS.

 

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**Item 7.****                ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**.

 

Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations (“MD&A”) is intended to help you understand CantelMedical Corp. (“Cantel”). The MD&A is provided as a supplement to andshould be read in conjunction with our financial statements and theaccompanying notes. Our MD&A includes the following sections:

 

**Overview** provides abrief description of our business and a summary of significant activity thathas affected or may affect our results of operations and financial condition.

 

**Resultsof Operations** provides a discussion of the consolidated resultsof operations for fiscal 2010 compared with fiscal 2009, and fiscal 2009compared with fiscal 2008.

 

**Liquidityand Capital Resources** provides an overview of our working capital,cash flows, contractual obligations, financing and foreign currency activities.

 

**CriticalAccounting Policies** provides a discussion of our accounting policiesthat require critical judgments, assumptions and estimates.

 

**Overview**

 

Cantel is a leadingprovider of infection prevention and control products and services in thehealthcare market, specializing in the following operating segments:

 

·                  Water Purification andFiltration: Water purification equipment and services,filtration and separation products, and disinfectants for the medical,pharmaceutical, biotech, beverage and commercial industrial markets.

 

·                  Healthcare Disposables: Single-use,infection prevention and control products used principally in the dental marketincluding face masks, sterilization pouches, towels and bibs, tray covers,saliva ejectors, germicidal wipes, plastic cups and disinfectants.

 

·                  Endoscope Reprocessing: Medicaldevice reprocessing systems, disinfectants, enzymatic detergents and othersupplies used to high-level disinfect flexible endoscopes.

 

·                  Dialysis: Medicaldevice reprocessing systems, sterilants/disinfectants, dialysate concentratesand other supplies for renal dialysis.

 

·      Therapeutic Filtration: Hollow fiber membrane filtrationand separation technologies for medical applications.        (Included in All Other reporting segment.)

 

·                  Specialty Packaging: Specialtypackaging and thermal control products, as well as related compliance training,for the transport of infectious and biological specimens and thermallysensitive pharmaceutical, medical and other products. (Included in All Otherreporting segment.)

 

·                  Chemistries:  Sterilants, disinfectants, detergents anddecontamination services used in various applications for infection preventionand control. (Included in All Other reporting segment.)

 

Mostof our equipment, consumables and supplies are used to help prevent theoccurrence or spread of infections.

 

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***Significant Activity***

 

(i)                                                        Net incomeincreased by 28% in fiscal 2010 compared with fiscal 2009. We continue tobenefit from having a broad portfolio of infection prevention and controlproducts sold into diverse business segments and we have proactively developedour overall business to where approximately 75% of our net sales areattributable to consumable products and service. The primary factors thatcontributed to this financial performance, as further described elsewhere inthis MD&A, were as follows:

 

·                  An increase innet income of approximately $1,250,000 due to an increase in demand during thefirst four months of fiscal 2010, partially offset by a high level of demandduring our fourth quarter of fiscal 2009, for healthcare disposables productsin both periods as a result of the outbreak of the novel H1N1 (swine flu) in April 2009,

 

·                  improved grossmargins as a result of numerous profit improvement and sales and marketinginitiatives and the continued shift in sales mix to higher margin disposables,

 

·                  higher sellingprices including those attributable to converting the sale of high-leveldisinfectants in our Endoscope Reprocessing segment from our former equipmentdistributor to our direct sales and service force at higher selling prices,

 

·                  reductions inmanufacturing, raw material and distribution costs,

 

·                  generalcompany-wide efforts to control operating expenses while still investing insales, marketing and research and development activities, and

 

·                  favorableinterest costs due to both reduced average interest rates as well as loweroutstanding borrowings.

 

The above favorable factors were partially offset by (i) decreasesin net sales and profitability in our Dialysis segment, (ii) increasedselling costs in our Endoscope Reprocessing segment and (iii) decreases innet sales of capital equipment in our Water Purification and Filtrationsegment, as further explained elsewhere in this MD&A. Additionally,although the outbreak of the novel H1N1 flu resulted in strong sales volume ofhigh margin face masks and other healthcare disposables products during thefirst four months of fiscal 2010, such sales volume has returned to a saleslevel that is similar to that which existed prior to the outbreak of the novelH1N1 flu given that the elevated level of reported cases of influenza viruseshas subsided.

 

(ii)                                                     We sell ourdialysis products to a concentrated number of customers. Sales in our Dialysissegment were adversely impacted by the continued loss of some lower margindialysate concentrate business from both domestic and international customersas a result of the highly competitive and price sensitive market for suchproduct, as well as the decrease in demand for our Renatron reprocessingequipment, as more fully described elsewhere in this MD&A. This reductionin dialysis sales has reduced overall profitability in this segment. Our marketfor dialysis reprocessing products is limited to dialysis centers that reusedialyzers, which market has been decreasing in the United States despite theenvironmental advantages and our belief that the per-procedure cost of reusedialyzers is more economical than single-use dialyzers. A further decrease inthe market for dialysis reprocessing products is likely to result in continuedloss of net sales and a lower level of operating income in this segment in thefuture. See “Risk Factors” elsewhere in this Form 10-K.

 

(iii)                                                  While overallsales and operating income have increased in our Water Purification andFiltration segment in fiscal 2010 compared with fiscal 2009, our net sales ofcapital equipment used for dialysis as well as commercial and industrialapplications have decreased primarily due to the slow growth of the overalleconomy and the deterioration in the credit markets in recent years, as morefully described elsewhere in this MD&A.

 

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(iv)                                                 Fluctuations inthe rates of currency exchange had an overall adverse impact on our net incomein fiscal 2010, compared with fiscal 2009, as more fully described elsewhere inthis MD&A.

 

(v)                                                    We declared ourfirst cash semiannual dividends of $0.05 per share of outstanding common stock,which were paid on January 29, 2010 and July 30, 2010, as more fullydescribed elsewhere in this MD&A.

 

(vi)                                                 We amended ourcredit facilities on May 28, 2010 primarily to extend the termination dateof the revolving credit facility from its August 1, 2010 expiration dateto August 1, 2011, as well as to expand our acquisition financingcapabilities, as more fully described elsewhere in this MD&A.

 

(vii)                                              Post-fiscal2010 acquisition:  We acquired the UnitedStates water purification business of Gambro Renal Products Inc. (“Gambro Water”or the “Gambro Acquisition”) on October 6, 2010, as more fully described in “Business — RecentAcquisition — Subsequent to July 31, 2010” and Note 3 to the ConsolidatedFinancial Statements.

 

(viii)                                           Fiscal 2010acquisition:  We acquired the business ofPurity Water Company of San Antonio, Inc. (“Purity”) on June 1, 2010,as more fully described in “Business— Fiscal 2010 Acquisition” and Note 3 to the Consolidated Financial Statements.

 

(ix)                                                   Fiscal 2009acquisition: We acquired the business of G.E.M. Water Systems Int’l, LLC (“G.E.M.”) on July 31, 2009, as morefully described in “Business — Fiscal 2009 Acquisition” and Note 3 tothe Consolidated Financial Statements.

 

(x)                                                      Fiscal 2008acquisitions: We acquired the businesses of Dialysis Services, Inc. (“DSI”)on August 1, 2007, Verimetrix, LLC (“Verimetrix”) on September 17,2007, and Strong Dental Products, Inc. (“Strong Dental”) on September 26,2007, as more fully described in Note 3 to the Consolidated FinancialStatements.

 

(xi)                                                   We created anew operating segment named Chemistries, as more fully described elsewhere inthis MD&A.

 

(xii)                                                In July 2009,we extended the life of certain “out-of-the-money” stock options previouslyawarded to certain executive officers. As a result, approximately $703,000 ofadditional stock-based compensation expense was recorded in fiscal 2009, whichdecreased both basic and diluted earnings per share from continuing operationsby $0.03, as more fully described in Note 11 to the Consolidated FinancialStatements and elsewhere in this MD&A.

 

(xiii)                                             In June 2008,we announced and began executing our plan to restructure our Netherlands manufacturingoperations as part of our continuing effort to reduce operating costs andleverage our existing United States infrastructure. As a result of thisrestructuring, approximately $345,000 and $365,000 of restructuring costs wererecorded in fiscals 2009 and 2008, respectively, which decreased both basic anddiluted earnings per share by $0.02 in each of fiscals 2009 and 2008, as morefully described in Note 18 to the Consolidated Financial Statements andelsewhere in this MD&A.

 

**Resultsof Operations**

 

Theresults of operations described below reflect the operating results of Canteland its wholly-owned subsidiaries.

 

Sincethe DSI, Verimetrix and Strong Dental acquisitions were completed on August 1,2007, September 17, 2007 and September 26, 2007, respectively, theirresults of operations are included in our results of operations for fiscals2010 and 2009 and the portion of fiscal 2008 subsequent to their respectiveacquisition dates. The acquisitions of DSI, Verimetrix and Strong Dental had anoverall insignificant effect on our results of operations for fiscals 2010 and2009 and the portion of fiscal 2008 subsequent to their respective acquisitiondates due to the small size of these businesses.

 

Sincethe G.E.M. acquisition was completed on the last day of fiscal 2009, itsresults of operations are included in our results of operations for fiscal2010, but are not reflected in our results of operations for fiscals 2009 and2008.

 

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TheJune 1, 2010 Purity acquisition had an insignificant effect on our resultsof operations for fiscal 2010 due to both the small size of this business aswell as its inclusion for only two months in fiscal 2010, and its results ofoperations are excluded for all prior periods.

 

Sincethe Gambro Acquisition was consummated after the end of fiscal 2010, itsresults of operations are not included in our results of operations for any ofthe periods presented.

 

Duringfiscal 2010, we changed our internal reporting processes to include a newoperating segment called Chemistries to reflect the way the Company, throughits executive management, manages, allocates resources and measures theperformance of its businesses. This new operating segment is the combination ofa small portion of our existing sterilant business, comprised of products soldon an OEM basis and previously recorded in our Water Purification andFiltration segment, and a new business operation that was created to capitalizeon our chemistry expertise and expand our product offerings in existing and newmarkets within the infection prevention and control arena. This new Chemistriesoperating segment has been combined for reporting purposes with our TherapeuticFiltration and Specialty Packaging operating segments into the All Otherreporting segment. All periods presented have been restated to reflect thischange.

 

Thefollowing table gives information as to the net sales from operations and thepercentage to the total net sales from operations for each of our reportingsegments.

 
| ** **                        | ** ** | **Year Ended July 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                        | ** ** | ** **                             | ** ** | ** ** | ** ** | **(Dollar Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **$**                                  | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
|                              |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Water Purification and Filtration |       | $                                      | 74,527     |   | 27.2 |   | $ | 68,941 |   | 26.5 |   | $ | 66,323 |   | 26.6 |   |
| Healthcare Disposables            |       | 69,729                                 |       | 25.5 |   | 64,085 |   | 24.7 |   | 58,657 |   | 23.5 |   |
| Endoscope Reprocessing            |       | 65,577                                 |       | 23.9 |   | 52,333 |   | 20.1 |   | 46,924 |   | 18.8 |   |
| Dialysis                          |       | 44,667                                 |       | 16.3 |   | 56,414 |   | 21.7 |   | 60,075 |   | 24.1 |   |
| All Other                         |       | 19,452                                 |       | 7.1 |   | 18,277 |   | 7.0 |   | 17,395 |   | 7.0 |   |
|                              |       | $                                      | 273,952    |   | 100.0 |   | $ | 260,050 |   | 100.0 |   | $ | 249,374 |   | 100.0 |   |

 

***Fiscal 2010 compared with Fiscal 2009***

 

***Net sales***

 

Netsales increased by $13,902,000, or 5.3%, to $273,952,000 in fiscal 2010 from$260,050,000 in fiscal 2009.

 

Theincrease in net sales in fiscal 2010 was principally attributable to increasesin sales of endoscope reprocessing products and services, water purificationand filtration products and services and healthcare disposables products,partially offset by a decrease in dialysis products.

 

Netsales of endoscope reprocessing products and services increased by 25.3% infiscal 2010 compared with fiscal 2009 primarily due to increases in bothdomestic and international demand for (i) our endoscope reprocessingequipment as a result of a more aggressive sales commission plan designed togain market share and expand into new markets and (ii) our disinfectants,equipment accessories and service due to the increased field population ofequipment. Additionally, the increase was due to higher selling prices of ourdisinfectants in the United States as a result of converting such prior periodsales from our former equipment distributor to our direct sales and serviceforce.

 

Netsales of water purification and filtration products and services increased by8.1% in fiscal 2010 compared with fiscal 2009 primarily due to (i) approximately$3,705,000 of net sales due to the acquisition of G.E.M. on July 31, 2009and Purity on June 1, 2010, (ii) an increase in demand for oursterilants and filters within our installed equipment base of business, and (iii) thetranslation of Canadian dollar net sales using a stronger Canadian dollaragainst the United States dollar, which favorably impacted net sales byapproximately $720,000. Partially offsetting these increases was a decrease indemand for our water purification equipment used for dialysis (including adecrease in demand for capital equipment by our largest customer) as well ascommercial and industrial applications primarily due to the slow growth of theoverall economy and the deterioration in the credit markets in recent years,which may continue to adversely affect capital equipment sales. Increases inselling prices of our water purification and filtration products and servicesdid not have a significant effect on net sales in fiscal 2010 compared withfiscal 2009.

 

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Netsales of healthcare disposables products increased by 8.8% in fiscal 2010compared with fiscal 2009 despite nominal growth in the overall dental marketprimarily due to (i) increased sales volume of high margin face masks,disinfectants and other healthcare disposables products during the first fourmonths of fiscal 2010, partially offset by a high level of demand during thefourth quarter of fiscal 2009, due to the outbreak of the novel H1N1 flu (swineflu) in April 2009, (ii) increased demand for our sterilization pouchand barrier cover products as a result of favorable sales and marketinginitiatives and (iii) approximately $725,000 in higher net sales as aresult of increases in selling prices that were implemented to offsetcorresponding supplier cost increases. Although the outbreak of the novel H1N1flu resulted in strong sales volume of high margin face masks and otherhealthcare disposables products during the first four months of fiscal 2010,such sales volume has returned to a sales level that is similar to that whichexisted prior to the outbreak of the novel H1N1 flu given that the elevatedlevel of reported cases of influenza viruses has subsided. Atypical demand forface masks is highly dependent upon the severity and timing of any pandemic fluoutbreak such as the recent novel H1N1 flu, the ability of our Company toeducate existing customers and potential new customers on the benefits of ourface masks, disinfectants and other products and the level of urgency ourcustomers and the general public develop and maintain with respect to epidemicand pandemic preparedness.

 

Netsales of dialysis products and services decreased by 20.8% in fiscal 2010compared with fiscal 2009 primarily due to (i) the continuing adverseimpact of losing some dialysate concentrate business (a concentrated acid orbicarbonate used to prepare dialysate, a chemical solution that draws wasteproducts from a patient’s blood through a dialyzer membrane during hemodialysistreatment) from domestic and international customers as a result of the highlycompetitive and price sensitive market for this lower margin commodity product,as well as various global economic factors with respect to internationaldemand, and (ii) a decrease in demand in the United States (including adecrease from our largest dialysis customer) and internationally for ourRenatron dialyzer reprocessing equipment. Due to sales price decreases by someof our competitors, we expect a continued decrease in net sales of our lowermargin dialysate concentrate product in the future as we elect not to pursueunprofitable concentrate sales. Furthermore, Fresenius Medical Care (“Fresenius”),the largest dialysis provider chain in the United States, manufacturesdialysate concentrate themselves and has been decreasing their purchases ofthat product from us and may continue to do so in the future. Our market fordialysis reprocessing products is limited to dialysis centers that reusedialyzers, which market has been decreasing in the United States despite theenvironmental advantages and our belief that the per procedure cost of reusedialyzers is more economical than single-use dialyzers. A further decrease inthe market for dialysis reprocessing products is likely to result in continuedloss of net sales and a lower level of operating income in this segment in thefuture. Increases in selling prices of our dialysis products did not have asignificant effect on net sales in fiscal 2010 compared with fiscal 2009.

 

Netsales in the All Other reporting segment increased by 6.4% in fiscal 2010compared with fiscal 2009 primarily due to a $795,000, or 33.1%, increase innet sales in our Chemistries operating segment primarily as a result ofincreased domestic and international demand of our sterilants sold on an OEMbasis. Increases in selling prices of our therapeutic filtration, specialtypackaging and chemistries products did not have a significant effect on netsales in the All Other segment in fiscal 2010 compared with fiscal 2009.

 

***Gross profit***

 

Grossprofit increased by $11,492,000, or 11.6%, to $110,971,000 in fiscal 2010 from$99,479,000 in fiscal 2009. Gross profit as a percentage of net sales infiscals 2010 and 2009 was 40.5% and 38.3%, respectively.

 

Thegross profit percentage in fiscal 2010 increased compared with fiscal 2009primarily due to (i) favorable sales mix due to the increased sales volumeof certain higher margin products such as sterilants and filters in our WaterPurification and Filtration segment, sterilization pouches, barrier covers,face masks and disinfectants in our Healthcare Disposables segment anddisinfectants and equipment accessories in our Endoscope Reprocessing segment,as well as decreased sales of our lower margin dialysate concentrate product inour Dialysis segment, (ii) higher selling prices including thoseattributable to converting the sale of high-level disinfectants in ourEndoscope Reprocessing segment from our former equipment distributor to ourdirect sales and service force at higher selling prices, (iii) a decreasein raw material costs due to the lower price of oil and (iv) improvedefficiencies in our manufacturing, distribution and service functions. However,we cannot provide assurances that our gross profit percentage will not beadversely affected in the future (i) by price competition in certain ofour segments such as Dialysis and Healthcare Disposables, (ii) byuncertainties associated with our product mix and (iii) if raw materialsand distribution costs increase and we are unable to implement price increases.Additionally, despite expensiveshipping costs, some of our competitors manufacture certain healthcaredisposable products in China and Southeast Asia due to lower overall costs incertain parts of that region of the world. Although we believe the quality ofour healthcare disposable products, which are generally produced in the UnitedStates, are superior to similar products produced in China and Southeast Asia,we expect to experience significant pricing pressure that will adversely affectour gross profit in fiscal 2011 in our Healthcare Disposables segment as aresult of low cost competition in China and Southeast Asia.

 

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***Operating expenses***

 

Sellingexpenses increased by $5,694,000, or 18.7%, to $36,092,000 in fiscal 2010 from$30,398,000 in fiscal 2009 primarily due to (i) additional sales personneland higher compensation expense principally in our Endoscope Reprocessingsegment relating to incentive compensation, including commissions expense froma more aggressive commission plan designed to gain market share and expand intonew markets, (ii) an increase in advertising and marketing expenseprimarily related to our Healthcare Disposables segment and (iii) increasedsales support services principally in our Water Purification and Filtration andEndoscope Reprocessing segments during the first six months of fiscal 2010.

 

Selling expenses as a percentage of net sales were 13.2% and 11.7% infiscals 2010 and 2009, respectively. The increase in our selling expense as apercentage of net sales was due to our strategic decision to invest in sellinginitiatives designed to gain or maintain market share as well as to expand intonew markets.

 

General and administrative expenses increased by $47,000 to $37,045,000in fiscal 2010 from $36,998,000 in fiscal 2009 primarily due to (i) highercompensation expense of approximately $940,000 relating to annual salaryincreases and incentive compensation in all our locations and additionalpersonnel principally in our Water Purification and Filtration segment and (ii) anincrease of approximately $345,000 relating to foreign currency primarily as aresult of the inclusion of foreign exchange gains during the prior year associatedwith translating certain foreign denominated assets into functional currenciesas well as the translation of general and administrative expenses of ourinternational subsidiaries using a significantly stronger Canadian dollaragainst the United States dollar. These increases were substantially offset by (i) approximately$400,000 in lower bad debt expense primarily in our Water Purification andFiltration segment, (ii) a $324,000 decrease in stock-based compensationexpense due to a $703,000 charge in July 2009 to extend the life ofcertain “out-of-the-money” stock options previously awarded to certainexecutive officers and (iii) a decrease in overhead and restructuringcosts at our Netherlands operation due to the completion of restructuringactivities, as more fully described elsewhere in this MD&A.

 

General and administrative expenses as a percentage of net sales were13.5% in fiscal 2010 compared with 14.2% in fiscal 2009.

 

Research and development expenses (which include continuing engineeringcosts) increased by $537,000 to $5,169,000 in fiscal 2010 from $4,632,000 infiscal 2009. This increase is primarily due to development work on certain newproducts in our newly created Chemistries operating segment. In fiscal 2011, weintend to further invest in research and development to leverage our newChemistry group across various infection prevention and control opportunities.

 

***Interest***

 

Interestexpense decreased by $1,470,000 to $1,169,000 in fiscal 2010 from $2,639,000 infiscal 2009 primarily due to decreases in average outstanding borrowings andaverage interest rates as well as a $148,000 charge in the prior year relatingto the ineffective portion of the change in fair value of an interest rate capagreement, as more fully described elsewhere in this MD&A and Note 12 tothe Consolidated Financial Statements.

 

Interestincome decreased by $85,000 to $59,000 in fiscal 2010, from $144,000 in fiscal2009, primarily due to a decrease in average interest rates.

 

***Income from operations before taxes***

 

Incomebefore income taxes increased by $6,599,000 to $31,555,000 in fiscal 2010 from$24,956,000 in fiscal 2009. The increase was primarily attributable to theimproved gross profit percentage on increased sales as well as lower interestexpense, partially offset by higher selling expenses, as further explainedabove.

 

***Income taxes***

 

Theconsolidated effective tax rate was 36.8% and 37.6% in fiscals 2010 and 2009,respectively. The decrease in the consolidated effective tax rate wasprincipally due to a lower level of cash repatriations from our foreignsubsidiaries and the geographic mix of pre-tax income, as described below.

 

Themajority of our income before income taxes was generated from our United Statesoperations, which had an overall effective tax rate of 37.6% and 38.6% infiscals 2010 and 2009, respectively. The decrease in our United Stateseffective tax rate in fiscal 2010, compared with fiscal 2009, was primarily dueto less income taxes related to foreign 

 

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repatriations.In fiscal 2010,  we provided for incometaxes on the repatriation of $6,000,000 in earnings from one of our Canadiansubsidiaries as compared with fiscal 2009 in which approximately $11,400,000 inearnings was repatriated from our subsidiaries in Canada and the Netherlands.

 

Dueto the uncertainty of our Netherlands subsidiary utilizing tax benefits in thefuture, a tax benefit was not recorded on the losses from operations at ourNetherlands subsidiary in fiscal 2009, thereby adversely affecting our overallconsolidated effective tax rate in the prior year period. In fiscal 2010, ourNetherlands operation became slightly profitable as a result of the prior yearrestructuring of its operations, as more fully described elsewhere in thisMD&A and Note 18 to the Consolidated Financial Statements.

 

OurCanadian operations had an overall effective tax rate of 22.6% and 16.8% infiscals 2010 and 2009, respectively. Approximately 3% and 5% of our incomebefore income taxes was generated from our Canadian operations in fiscals 2010and 2009, respectively. Overall statutory tax rates in Canada are significantlybelow comparable rates in the United States. Additionally, the low overalleffective tax rate in fiscal 2009 was attributable to the impact of a loweroverall effective rate in our Specialty Packaging segment due to enacted ratedeductions as applied to existing deferred income tax liabilities.

 

Infiscals 2010 and 2009, approximately 2% of our income before income taxes wasgenerated from our operations in Singapore, a country with a low corporate taxstructure. The overall effective tax rate for our Singapore operation was 11.8%and 13.1% in fiscals 2010 and 2009, respectively.

 

Theresults of operations for our subsidiary in Japan did not have a significantimpact on our overall effective tax rate in fiscals 2010 and 2009 due to thesize of income before income taxes generated from this operation.

 

Werecord liabilities for an unrecognized tax benefit when a tax benefit for anuncertain tax position is taken or expected to be taken on a tax return, but isnot recognized in our Consolidated Financial Statements because it does notmeet the more-likely-than-not recognition threshold that the uncertain taxposition would be sustained upon examination by the applicable taxingauthority. The tax benefits recognized in the financial statements from such aposition are measured based on the largest benefit that has a greater thanfifty percent likelihood of being realized upon settlement with the taxauthorities. The majority of our unrecognized tax benefits originated fromacquisitions. Previously, any adjustments upon resolution of income taxuncertainties that predate or result from acquisitions were recorded as anincrease or decrease to goodwill. On August 1, 2009, we adopted AccountingStandards Codification (“ASC”) 805, “*BusinessCombinations*” (“ASC 805”), which requires the resolution of incometax uncertainties that predate or result from acquisitions to be recognized inour results of operations beginning with fiscal 2010. However, if ourunrecognized tax benefits are recognized in our financial statements in futureperiods, there would not be a significant impact to our overall effective taxrate due to the size of the unrecognized tax benefits in relation to our incomebefore income taxes. Except for decreases due to the lapse of applicablestatutes of limitation, we do not expect such unrecognized tax benefits tosignificantly decrease or increase in the next twelve months.

 

Areconciliation of the beginning and ending amounts of gross unrecognized taxbenefits is as follows:

 

| ** **                                       | ** ** | **Unrecognized**      | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **Tax Benefits** | ** ** |
|                                             |       |                  |       |
| Unrecognized  tax benefits on July 31, 2008 |       | $                     | 427,000    |   |
| Lapse  of statute of limitations                 |       | (47,000               | )          |
| Unrecognized  tax benefits on July 31, 2009 |       | 380,000               |       |
| Lapse  of statute of limitations                 |       | (172,000              | )          |
| Unrecognized  tax benefits on July 31, 2010 |       | $                     | 208,000    |   |

 

Generally,the Company is no longer subject to federal, state or foreign income taxexaminations for fiscal years ended prior to July 31, 2004.

 

Ourpolicy is to record potential interest and penalties related to income taxpositions in interest expense and general and administrative expense,respectively, in our Consolidated Financial Statements. However, such amountshave been relatively insignificant due to the amount of our unrecognized taxbenefits relating to uncertain tax positions.

 

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***Stock-Based Compensation***

 

Thefollowing table shows the income statement components of stock-basedcompensation expense recognized in the Consolidated Statements of Income:

 
| ** **                                                              | ** ** | **Year Ended July 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                    |       |                                   |       |   |   |   |   |
| Cost  of sales                                                          |       | $                                      | 130,000    |   | $ | 70,000 |   | $ | 43,000 |   |
| Operating  expenses:                                                    |       |                                   |       |   |   |   |   |
| Selling                                                                 |       | 410,000                                |       | 216,000 |   | 123,000 |   |
| General  and administrative                                             |       | 2,560,000                              |       | 2,884,000 |   | 1,778,000 |   |
| Research  and development                                               |       | 30,000                                 |       | 17,000 |   | 17,000 |   |
| Total  operating expenses                                               |       | 3,000,000                              |       | 3,117,000 |   | 1,918,000 |   |
| Stock-based  compensation before income taxes                           |       | 3,130,000                              |       | 3,187,000 |   | 1,961,000 |   |
| Income  tax benefits                                                    |       | (1,137,000                             | )          | (1,226,000 | ) | (758,000 | ) |
| Total  stock-based compensation expense, net of tax                     |       | $                                      | 1,993,000  |   | $ | 1,961,000 |   | $ | 1,203,000 |   |
|                                                                    |       |                                   |       |   |   |   |   |
| Decrease  in earnings per common share due to stock-based compensation: |       |                                   |       |   |   |   |   |
|                                                                    |       |                                   |       |   |   |   |   |
| Basic                                                                   |       | $                                      | 0.12       |   | $ | 0.12 |   | $ | 0.07 |   |
|                                                                    |       |                                   |       |   |   |   |   |
| Diluted                                                                 |       | $                                      | 0.12       |   | $ | 0.12 |   | $ | 0.07 |   |

 

Theabove stock-based compensation expense before income taxes was recorded in theConsolidated Financial Statements as stock-based compensation expense and anincrease to additional paid-in capital. The related income tax benefits (whichpertain only to stock awards and options that do not qualify as incentive stockoptions) were recorded as an increase to long-term deferred income tax assets(which are netted with long-term deferred income tax liabilities) and areduction to income tax expense.

 

Thestock-based compensation expense recorded in our Consolidated FinancialStatements may not be representative of the effect of stock-based compensationexpense in future periods due to the level of awards issued in past years(which level may not be similar in the future), modifications of existingawards and assumptions used in determining fair value, expected lives andestimated forfeitures. We determine the fair value of each stock award usingthe closing market price of our Common Stock on the date of grant. We estimatethe fair value of each option grant on the date of grant using theBlack-Scholes option valuation model. The determination of fair value using anoption-pricing model is affected by our stock price as well as assumptionsregarding a number of subjective variables. These variables include, but arenot limited to, the expected stock price volatility over the term of theexpected option life (which is determined by using the historical closingprices of our Common Stock), the expected dividend yield (which historicallywas 0% and is now approximately 0.6% as we began paying dividends in fiscal2010), and the expected option life (which is based on historical exercisebehavior). If factors change and we employ different assumptions in theapplication of ASC Topic 718, “Compensation-Stock Compensation”, (“ASC 718”),in future periods, the compensation expense that we would record may differsignificantly from what we have recorded in the current period.

 

All of our stock options and stock awards (which consist only ofrestricted shares) are subject to graded vesting in which portions of the awardvest at different times during the vesting period, as opposed to awards thatvest at the end of the vesting period. We recognize compensation expense forawards subject to graded vesting using the straight-line basis over the vestingperiod, reduced by estimated forfeitures. At July 31, 2010, totalunrecognized stock-based compensation expense, before income taxes, related tototal nonvested stock options and stock awards which are expected to vest was$3,812,000 with a remaining weighted average period of 20 months over whichsuch expense is expected to be recognized.

 

If certain criteria are met when options are exercised or restrictedstock becomes vested, the Company is allowed a deduction on its income taxreturn. Accordingly, we account for the income tax effect on such income taxdeductions as additional paid-in capital or a reduction of deferred income taxassets (which are netted with long-term deferred income tax liabilities) and as

 

34

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areduction of income taxes payable. In fiscals 2010 and 2009, such income taxdeductions reduced income taxes payable by $1,287,000 and $745,000,respectively.

 

We classify the cash flows resulting fromexcess tax benefits as financing cash flows on our Consolidated Statements ofCash Flows. Excess tax benefits arise when the ultimate tax effect of thededuction for tax purposes is greater than the tax benefit on stockcompensation expense (including tax benefits on stock compensation expense thathas only been reflected in past pro forma disclosures relating to fiscal yearsprior to August 1, 2005) which was determined based upon the award’s fairvalue.

 

***Fiscal 2009 compared with Fiscal 2008***

 

***Net sales***

 

Netsales increased by $10,676,000, or 4.3%, to $260,050,000 in fiscal 2009 from$249,374,000 in fiscal 2008.

 

Netsales were adversely impacted in fiscal 2009 compared with fiscal 2008 byapproximately $950,000 due to the translation of Canadian dollar net sales,primarily of our Water Purification and Filtration operating segment, using aweaker Canadian dollar against the United States dollar.

 

Theincrease in net sales in fiscal 2009 was principally attributable to increasesin sales of healthcare disposables products, endoscope reprocessing productsand services, water purification and filtration products and services andtherapeutic filtration products (included in All Other), partially offset by adecrease in dialysis products.

 

Netsales of healthcare disposables products increased by 9.3% in fiscal 2009compared with fiscal 2008 despite negative growth in the overall dental market,primarily due to (i) increased sales volume of high margin face masks,disinfectants and other healthcare disposables products due to the outbreak ofthe novel H1N1 flu (swine flu) in April 2009, (ii) approximately$2,700,000 in higher net sales due to an increase in selling prices, which wereimplemented to offset corresponding supplier cost increases, (iii) theadverse impact on the first quarter of fiscal 2008 due to the consolidation ofcertain distributors of our dental products during 2007 resulting in therationalization of duplicate inventories of the consolidated companies and (iv) approximately$194,000 in incremental net sales in the first quarter of fiscal 2009 due tothe acquisition of Strong Dental during the first quarter of fiscal 2008.Although the outbreak of the novel H1N1 flu has resulted in strong sales volumeduring our fourth quarter of high margin face masks and other healthcaredisposables products, we cannot provide assurances that such increased saleslevels can be sustained throughout fiscal 2010 since such demand is highlydependent upon the severity and timing of the novel H1N1 flu, the ability ofour Company to educate existing customers and potential new customers on thebenefits of our face masks, disinfectants and other products and the level ofurgency our customers and the general public develop and maintain with respectto epidemic and pandemic preparedness.

 

Netsales of endoscope reprocessing products and services increased by 11.5% infiscal 2009 compared with fiscal 2008 primarily due to (i) the increase indemand in the United States for our disinfectants and product service due tothe increased field population of equipment as well as our ability to graduallyconvert the sale of such items from our former equipment distributor (whocontinued to purchase high-level disinfectants, cleaners and consumables fromus and provide product service to our customers) to our direct sales andservice force at higher selling prices, (ii) higher selling prices, mostof which relates to the direct sale of disinfectants, consumables and productservice, which resulted in approximately $2,250,000 in incremental net sales infiscal 2009 compared with fiscal 2008, and (iii) approximately $184,000 inincremental net sales in the first quarter of our fiscal 2009 due to theacquisition of Verimetrix during the first quarter of fiscal 2008. Partiallyoffsetting these increases was a decrease in sales of endoscope reprocessingequipment in fiscal 2009 as a result of delayed spending on such investmentsdue to the recent deterioration in the general economy and credit markets,which may continue to adversely affect future equipment sales.

 

Netsales of water purification and filtration products and services increased by3.9% in fiscal 2009 compared with fiscal 2008, primarily due to (i) anincrease in demand during fiscal 2009 for our sterilants and filters bypharmaceutical companies and within our installed equipment base of business,including one of our largest customers who standardized on our consumableproducts in their ordering system utilized by their dialysis clinics and (ii) higherselling prices, which offset increased manufacturing costs and favorablyimpacted net sales in fiscal 2009 by approximately $2,150,000. Partiallyoffsetting these increases were delayed investments during fiscal 2009 bycustomers of our water purification equipment used for dialysis as well as forcommercial and industrial (large capital) applications as a result of thedeterioration in the general economy and credit markets, which may continue toadversely affect capital equipment sales, and an $880,000 decrease in sales dueto the translation of Canadian dollar net sales using a weaker Canadian dollaragainst the United States dollar.

 

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Netsales contributed by the Therapeutic Filtration operating segment were$9,523,000, an increase of 14.8%, in fiscal 2009 compared with fiscal 2008. Theincrease in sales was primarily due to increases in both international anddomestic demand for our hemoconcentrator products (filtration devices used toconcentrate red blood cells and remove excess fluid from the bloodstream duringopen-heart surgery) and hemofilter products (filtration devices that perform aslow, continuous blood filtration therapy used to control fluid overload andacute renal failure in unstable, critically ill patients who cannot toleratethe rapid filtration rates of conventional hemodialysis). Increases in sellingprices of our therapeutic filtration products did not have a significant effecton net sales in fiscal 2009 compared with fiscal 2008.

 

Netsales of dialysis products and services decreased by 6.1% in fiscal 2009compared with fiscal 2008, primarily due to (i) the continuing adverseimpact of previously losing some dialysate concentrate business (a concentratedacid or bicarbonate used to prepare dialysate, a chemical solution that drawswaste products from a patient’s blood through a dialyzer membrane duringhemodialysis treatment) from domestic customers as a result of the highlycompetitive and price sensitive market for this low margin commodity product,and (ii) a decrease in net sales of low margin dialysis reuse supplies.Due to sales price decreases by some of our competitors, we expect a continueddecrease in net sales of our low margin dialysate concentrate product in fiscal2010 as we elect not to pursue unprofitable concentrate sales. Furthermore,Fresenius Medical Care (“Fresenius”), the largest dialysis provider chain inthe United States, manufactures dialysate concentrate themselves and has beengradually decreasing their purchases of that product from us and may continueto do so in fiscal 2010. Additionally, we cannot provide assurances that thelevel of concentrate sales to international customers will be sustained.Partially offsetting these decreases were higher selling prices, whichfavorably impacted net sales in fiscal 2009 by approximately $950,000, topartially offset higher manufacturing and shipping costs, including freightinvoiced to customers (related costs of a similar amount are included withincost of sales).

 

Netsales contributed by the Specialty Packaging operating segment were $6,355,000in fiscal 2009, a decrease of 7.0% compared with fiscal 2008. This decrease insales was primarily due to decreased customer demand in the United States forour specialty packaging products due to changes in regulatory requirements,increased competition and a decrease in clinical trials by our customersprimarily due to the deterioration in the general economy. Increases in sellingprices of our specialty packaging products did not have a significant effect onnet sales in fiscal 2009 compared with fiscal 2008.

 

***Gross profit***

 

Grossprofit increased by $11,853,000, or 13.5%, to $99,479,000 in fiscal 2009 from$87,626,000 in fiscal 2008. Gross profit as a percentage of net sales infiscals 2009 and 2008 was 38.3% and 35.1%, respectively.

 

Thegross profit percentage in fiscal 2009 increased compared with fiscal 2008primarily due to (i) favorable sales mix due to the increased sales volumeof certain high margin products such as disinfectants and consumables in ourEndoscope Reprocessing segment, face masks and sterilization accessories in ourHealthcare Disposables segment, and sterilants and filters in our WaterPurification and Filtration segment, as well as decreased sales of our lowmargin dialysate concentrate product in our Dialysis segment, (ii) higherselling prices including those attributable to our ability to gradually convertthe sale of high-level disinfectants, cleaners, and consumables in ourEndoscope Reprocessing segment from our former equipment distributor to ourdirect sales and service force at higher selling prices, (iii) a decreasein raw material and distribution costs in all our segments due to the lowerprice of fuel and oil, (iv) improved efficiencies in our manufacturing,distribution and service functions and (v) inefficiencies in our WaterPurification and Filtration segment during the three months ended October 31,2007 as a result of the integration of the acquired GE Water & ProcessTechnologies’ water dialysis business into our facilities. However, we cannotprovide assurances that this gross profit percentage can be sustained,especially if raw materials and distribution costs increase and we are unableto implement price increases or we experience a significant change in sales mixaway from higher margin products.

 

***Operating expenses***

 

Sellingexpenses increased by $1,762,000, or 6.2%, to $30,398,000 in fiscal 2009 from$28,636,000 in fiscal 2008, primarily due to (i) higher compensationexpense relating to annual salary increases and incentive compensation in allof our reporting segments and additional sales personnel primarily in our WaterPurification and Filtration and Healthcare Disposables segments and (ii) anincrease of approximately $285,000 in advertising and marketing expenseprimarily related to our Healthcare Disposables segment. These increases werepartially offset by a decrease of approximately $280,000 as a result oftranslating selling expenses of our international subsidiaries using a weakerCanadian dollar and euro against the United States dollar.

 

Selling expenses as a percentage of net sales were 11.7% in fiscal 2009compared with 11.5% in fiscal 2008.

 

36

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General and administrative expenses were $36,998,000 and $37,013,000 infiscals 2009 and 2008, respectively. General and administrative expenses decreased principally due to (i) theprior year inclusion of approximately $720,000 in separation benefits and othercosts related to the resignation of our former President and Chief ExecutiveOfficer on April 22, 2008, (ii) a decrease in overhead at ourNetherlands operation due to the completion of restructuring activities, asmore fully described elsewhere in this MD&A, (iii) a decrease ofapproximately $580,000 as a result of foreign exchange gains associated withtranslating certain foreign denominated assets into functional currencies andthe translation of general and administrative expenses of our internationalsubsidiaries using a significantly weaker Canadian dollar against the UnitedStates dollar, and (iv) a decrease of $522,000 in amortization expense ofintangible assets. These decreases were offset by an increase in compensationexpense primarily related to annual salary increases and incentive compensationin all of our locations and an increase of approximately $1,106,000 instock-based compensation expense including a $703,000 charge in July 2009to extend the life of certain “out-of-the-money” stock options previouslyawarded to certain executive officers, as more fully described elsewhere inthis MD&A.

 

General and administrative expenses as a percentage of net sales were14.2% in fiscal 2009 compared with 14.8% in fiscal 2008.

 

Researchand development expenses (which include continuing engineering costs) were$4,632,000 and $4,010,000 in fiscals 2009 and 2008, respectively. The increasein research and development expenses in fiscal 2009, compared with fiscal 2008,is primarily due to increased development work on certain new products as wellas continuing engineering on existing products primarily in our WaterPurification and Filtration, Endoscope Reprocessing and Therapeutic Filtrationsegments.

 

***Interest***

 

Interestexpense decreased by $1,992,000 to $2,639,000 in fiscal 2009, from $4,631,000in fiscal 2008, primarily due to decreases in average outstanding borrowingsand average interest rates, partially offset by a $148,000 charge relating tothe ineffective portion of the change in fair value of an interest rate capagreement, as more fully described elsewhere in this MD&A and Note 12 tothe Consolidated Financial Statements.

 

Interestincome decreased by $371,000 to $144,000 in fiscal 2009, from $515,000 infiscal 2008, primarily due to a decrease in average interest rates.

 

***Income before taxes***

 

Incomebefore income taxes increased by $11,105,000 to $24,956,000 in fiscal 2009 from$13,851,000 in fiscal 2008. The increase was primarily attributable to theimproved gross profit percentage on increased sales as well as lower interestexpense, as further explained above.

 

***Income taxes***

 

Theconsolidated effective tax rate was 37.6% and 37.2% in fiscals 2009 and 2008,respectively. The consolidated effective tax rate for fiscal 2009 was affectedprincipally by the geographic mix of pre-tax income, repatriation of cash fromour foreign subsidiaries and the impact of various tax rate changes, asdescribed below.

 

Themajority of our income before income taxes was generated from our United Statesoperations, which had an overall effective tax rate of 38.6% and 34.4% infiscals 2009 and 2008, respectively. The increase in our United Stateseffective tax rate in fiscal 2009, compared with fiscal 2008, was due to anincrease in our Federal tax rate to 35.0% and additional taxes relating to therepatriation of approximately $11,400,000 in earnings from our subsidiaries inCanada and the Netherlands, partially offset by recently enacted Federal taxlegislation that enabled us to claim the research and experimentation taxcredit as well as New York state tax rate reductions enacted in 2008, whichprimarily relate to our Healthcare Disposables segment. Such New York state taxrate reductions had a significant favorable effect on our fiscal 2008 effectivetax rate in the year of enactment.

 

Approximately5% of our fiscal 2009 income before income taxes was generated from ourCanadian operations, which had an overall effective tax rate in fiscals 2009and 2008 of 16.8% and 22.5%, respectively. Overall statutory tax rates inCanada are significantly below comparable rates in the United States.Additionally, the low overall effective tax rate in fiscal 2009 wasattributable to the impact of a lower overall effective rate in our SpecialtyPackaging segment due to recently enacted rate reductions as applied toexisting deferred income tax liabilities.

 

37

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Dueto the uncertainty of our Netherlands subsidiary utilizing tax benefits in thefuture, a tax benefit was not recorded on the losses from operations at ourNetherlands subsidiary in fiscals 2009 and 2008, thereby adversely affectingour overall consolidated effective tax rate. The overall loss from ourNetherlands operation in fiscal 2009 decreased compared with fiscal 2008 as aresult of the restructuring of its operations, as more fully describedelsewhere in this MD&A and Note 18 to the Consolidated FinancialStatements.

 

Theresults of operations for our subsidiaries in Japan and Singapore did not havea significant impact on our overall effective tax rate in fiscals 2009 and 2008due to the size of these operations relative to our United States, Canada andNetherlands operations. However, during fiscal 2008, we decided to place a fullvaluation allowance against the NOLs of our Japanese subsidiary, which resultedin the recording of tax expense on the past losses of our subsidiary in Japan.

 

Werecord liabilities for an unrecognized tax benefit when a tax benefit for anuncertain tax position is taken or expected to be taken on a tax return, but isnot recognized in our Consolidated Financial Statements because it does notmeet the more-likely-than-not recognition threshold that the uncertain taxposition would be sustained upon examination by the applicable taxing authority.The majority of our unrecognized tax benefits originated from acquisitions.Accordingly, any adjustments upon resolution of income tax uncertainties thatpredate or result from acquisitions have been recorded as an increase ordecrease to goodwill. On August 1, 2009, we adopted ASC 805, whichrequires the resolution of income tax uncertainties that predate or result fromacquisitions to be recognized in our results of operations beginning withfiscal 2010. However, if our unrecognized tax benefits are recognized in ourfinancial statements in future periods, there would not be a significant impactto our effective tax rate due to the size of the unrecognized tax benefits inrelation to our income before income taxes. We do not expect such unrecognizedtax benefits to significantly decrease or increase in the next twelve months.

 

Areconciliation of the beginning and ending amounts of gross unrecognized taxbenefits is as follows:

 
| ** **                                        | ** ** | **Unrecognized**      | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **Tax Benefits** | ** ** |
|                                              |       |                  |       |
| Unrecognized  tax benefits on August 1, 2007 |       | $                     | 484,000    |   |
| Lapse  of statute of limitations                  |       | (57,000               | )          |
| Unrecognized  tax benefits on July 31, 2008  |       | 427,000               |       |
| Lapse  of statute of limitations                  |       | (47,000               | )          |
| Unrecognized  tax benefits on July 31, 2009  |       | $                     | 380,000    |   |

 

Generally,the Company is no longer subject to federal, state or foreign income taxexaminations for fiscal years ended prior to July 31, 2003.

 

Ourpolicy is to record potential interest and penalties related to income taxpositions in interest expense and general and administrative expense,respectively, in our Consolidated Financial Statements. However, such amountshave been relatively insignificant due to the amount of our unrecognized taxbenefits relating to uncertain tax positions.

 

***Stock-Based Compensation***

 

Stock-basedcompensation expense before income taxes was recorded in the ConsolidatedFinancial Statements as stock-based compensation expense (which decreased bothbasic and diluted earnings per share by $0.12, $0.07 and $0.06 in fiscals 2009,2008 and 2007, respectively) and an increase to additional paid-in capital. Therelated income tax benefits (which pertain only to stock awards and optionsthat do not qualify as incentive stock options) were recorded as an increase tolong-term deferred income tax assets (which are netted with long-term deferredincome tax liabilities) or a reduction to income taxes payable, depending onthe timing of the deduction, and a reduction to income tax expense.

 

OnJuly 31, 2009, we extended the life of 456,001 fully vested “out-of-the-money”stock options previously awarded to certain executive officers (sevenindividuals in total) under our 1997 Employee Stock Option Plan. Such optionswere scheduled to expire within six months after July 31, 2009 and hadexercise prices ranging from $17.14 to $22.93, which were greater than theclosing price of $15.48 on July 31, 2009, the date the CompensationCommittee of our Board of Directors authorized the modification. The solemodification was to extend the options’ expiration dates to January 31,2011. All other terms and conditions of the stock options remain the same. As aresult of this modification, approximately $703,000 in 

 

38

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additionalstock-based compensation expense was recorded in our Consolidated FinancialStatements on July 31, 2009, which decreased both basic and dilutedearnings per share by $0.03.

 

Thestock-based compensation expense recorded in our Consolidated FinancialStatements may not be representative of the effect of stock-based compensationexpense in future periods due to the level of awards issued in past years(which level may not be similar in the future), assumptions used in determiningfair value, expected lives and estimated forfeitures. We determine the fairvalue of each stock award using the closing market price of our Common Stock onthe date of grant. We estimate the fair value of each option grant on the dateof grant using the Black-Scholes option valuation model. The determination offair value using an option-pricing model is affected by our stock price as wellas assumptions regarding a number of subjective variables. These variablesinclude, but are not limited to, the expected stock price volatility over theterm of the expected option life (which is determined by using the historicalclosing prices of our Common Stock), the expected dividend yield (which isexpected to be 0%), and the expected option life (which is based on historicalexercise behavior). If factors change and we employ different assumptions inthe application of ASC 718 in future periods, the compensation expense that wewould record under ASC 718 may differ significantly from what we have recordedin the current period.

 

All of our stock options and stock awards (which consist only ofrestricted shares) are subject to graded vesting in which portions of the awardvest at different times during the vesting period, as opposed to awards thatvest at the end of the vesting period. We recognize compensation expense forawards subject to graded vesting using the straight-line basis over the vestingperiod, reduced by estimated forfeitures. At July 31, 2009, totalunrecognized stock-based compensation expense, net of tax, related to totalnonvested stock options and stock awards which are expected to vest was$2,157,000 with a remaining weighted average period of 20 months over whichsuch expense is expected to be recognized.

 

If certain criteria are met when options are exercised or restrictedstock becomes vested, the Company is allowed a deduction on its income taxreturn. Accordingly, we account for the income tax effect on such income taxdeductions as additional paid-in capital and as a reduction of income taxespayable. In fiscals 2009 and 2008, options exercised and the vesting ofrestricted stock resulted in income tax deductions that reduced income taxespayable by $745,000 and $895,000, respectively.

 

We classify the cash flows resulting fromexcess tax benefits as financing cash flows on our Consolidated Statements ofCash Flows. Excess tax benefits arise when the ultimate tax effect of thededuction for tax purposes is greater than the tax benefit on stockcompensation expense (including tax benefits on stock compensation expense thathas only been reflected in past pro forma disclosures relating to fiscal yearsprior to August 1, 2005) which was determined based upon the award’s fairvalue.

 

**Liquidity and Capital Resources**

 

***Working capital***

 

AtJuly 31, 2010, our working capital was $53,747,000, compared with$49,797,000 at July 31, 2009.

 

***Cash flows from operating activities***

 

Netcash provided by operating activities was $29,033,000, $30,992,000 and$18,557,000 for fiscals 2010, 2009 and 2008, respectively. In fiscal 2010, thenet cash provided by operating activities was primarily due to net income(after adjusting for depreciation, amortization, stock-based compensationexpense and deferred income taxes) and increases in accounts payable, deferredrevenue and accrued expenses (due to an increase in customer deposits relatingto capital equipment sales in our Water Purification and Filtration segment)and income taxes payable (due to timing of payments), partially offset byincreases in inventories (due to planned strategic increases in stock levels ofcertain products primarily in our Healthcare Disposables and EndoscopeReprocessing segments) and accounts receivable (due to strong July salesin our Endoscope Reprocessing segment).

 

Infiscal 2009, net cash provided by operating activities was primarily due to netincome (after adjusting for depreciation, amortization, stock-basedcompensation expense and deferred income taxes) and a decrease in inventories(due to strong July sales in our Healthcare Disposables and EndoscopeReprocessing segments as well as a decrease in the cost of certain rawmaterials), partially offset by an increase in prepaid expenses and othercurrent assets (due to an increase in prepaid commissions relating to servicecontracts in our Endoscope Reprocessing segment, as well as the timing ofcertain insurance premium payments).

 

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Infiscal 2008, net cash provided by operating activities was primarily due to netincome (after adjusting for depreciation, amortization, stock-basedcompensation expense and deferred income taxes), a decrease in accountsreceivable (due to improved collections) and an increase in income taxespayable (due to timing associated with payments), partially offset by increasesin inventories (due to planned increases in stock levels of certain productsprimarily in our Endoscope Reprocessing and Healthcare Disposables segments)and prepaid expenses (due to the prepayment of certain operating expensesprimarily relating to commissions).

 

***Cash flows from investing activities***

 

Netcash used in investing activities was $8,240,000, $11,450,000 and $18,466,000in fiscals 2010, 2009 and 2008, respectively. In fiscal 2010, net cash used ininvesting activities was primarily for capital expenditures and the acquisitionof Purity. In fiscal 2009, net cash used in investing activities was primarilyfor the acquisition of G.E.M, a payment for an acquisition earnout to theformer owners of Crosstex and capital expenditures, partially offset byproceeds from the disposal of our building in the Netherlands. In fiscal 2008,net cash used in investing activities was primarily for the acquisitions ofDSI, Verimetrix and Strong Dental, a payment for an acquisition earnout to theformer owners of Crosstex and capital expenditures.

 

***Cash flows from financing activities***

 

Netcash used in financing activities was $21,846,000 and  $13,820,000 in fiscals 2010 and 2009,respectively, compared with net cash provided by financing activities of$1,882,000 in fiscal 2008. In fiscal 2010, net cash used in financingactivities was primarily attributable to repayments under our credit facilitiesand the payment of dividends to our shareholders, partially offset by proceedsfrom the exercises of stock options. In fiscal 2009, net cash used in financingactivities was primarily attributable to repayments under our creditfacilities, partially offset by a borrowing under our revolving credit facilityand proceeds from the exercises of stock options. In fiscal 2008, net cashprovided by financing activities was primarily attributable to borrowings underour revolving credit facility primarily related to the acquisitions of DSI,Verimetrix and Strong Dental and proceeds from the exercises of stock options,partially offset by repayments under our credit facilities.

 

***Dividends***

 

In December 2009, we announced that we intend to pay, for thefirst time, semiannual cash dividends of $0.05 per outstanding share, or $0.10per share annually, of the Company’s Common Stock. The first cash dividend of$0.05 per share of outstanding Common Stock, which totaled $840,000, was paidon January 29, 2010 to shareholders of record at the close of business on January 15,2010. The second cash dividend of $0.05 per share of outstanding Common Stock,which totaled $843,000, was paid on July 30, 2010 to shareholders of recordat the close of business on July 15, 2010. Future declaration of dividendsand the establishment of future record and payment dates are subject to thefinal determination of the Company’s Board of Directors.

 

***Restructuring activities***

 

During the fourth quarter of fiscal 2008, our management approved andinitiated plans to restructure our Netherlands subsidiary by relocating all ofour manufacturing operations from the Netherlands to the United States. Thisaction is part of our continuing effort to reduce operating costs and improveefficiencies by leveraging the existing infrastructure of our Minntechoperations in Minnesota. The elimination of manufacturing operations in theNetherlands has led to the end of onsite material management, quality assurance,finance and accounting, human resources and some customer service functions.However, we continue to maintain a strong marketing, sales, service andtechnical support presence based in the Netherlands to serve customersthroughout Europe, the Middle East and Africa.

 

In fiscals 2009 and 2008, we recorded $345,000 and $365,000,respectively, in restructuring costs, which decreased both basic and dilutedearnings per share by approximately $0.02 in both years. In fiscal 2009,$163,000 was recorded in cost of sales and $182,000 was recorded in general andadministrative expenses. In fiscal 2008, $275,000 was recorded in cost of salesand $90,000 was recorded in general and administrative expenses. Therestructuring plan was completed by July 31, 2009 and we have not incurredany additional restructuring costs since that date. The majority of therestructuring costs were included in our Endoscope Reprocessing segment. Sincethe above costs were recorded in our Netherlands subsidiary, which had beenexperiencing losses from its operations, tax benefits on the above costs werenot recorded.

 

As part of the restructuring plan, we sold our Netherlands building andland on May 19, 2009 and entered into a lease for 2.5 years with the newowner so we can continue to use the facility as our European sales and serviceheadquarters as well as for warehouse and distribution activity. The sale ofthe building and land resulted in a gain of $146,000, which is

 

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beingamortized over the life of the lease and is recorded in deferred revenue andother long-term liabilities. The rent for the full 2.5 year lease of $325,000was paid from the sale proceeds and recorded in prepaid expenses and otherassets.

 

***Long-term contractual obligations***

 

Asof July 31, 2010, aggregate annual required payments over the next fiveyears and thereafter under our contractual obligations that have long-termcomponents are as follows:

 
| ** **                                                  | ** ** | **Year Ended July 31,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                  | ** ** | **(Amounts in thousands)**   | ** ** |
| ** **                                                  | ** ** | **2011**                               | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **2015** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                                        |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Maturities  of the credit facilities (1)                    |       | $                                      | 10,000     |   | $ | 11,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 21,000 |   |
| Expected  interest payments under the credit facilities (2) |       | 340                                    |       | 1 |   | — |   | — |   | — |   | — |   | 341 |   |
| Minimum  commitments under noncancelable operating leases   |       | 3,181                                  |       | 2,375 |   | 1,705 |   | 1,370 |   | 1,005 |   | 5,574 |   | 15,210 |   |
| Minimum  commitments under noncancelable capital leases     |       | 14                                     |       | — |   | — |   | — |   | — |   | — |   | 14 |   |
| Deferred  compensation and other                            |       | 406                                    |       | 264 |   | 38 |   | 33 |   | 34 |   | 132 |   | 907 |   |
| Employment  agreements                                      |       | 3,073                                  |       | 356 |   | — |   | — |   | — |   | — |   | 3,429 |   |
| Total  contractual obligations                              |       | $                                      | 17,014     |   | $ | 13,996 |   | $ | 1,743 |   | $ | 1,403 |   | $ | 1,039 |   | $ | 5,706 |   | $ | 40,901 |   |

 

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(1)                                  As of July 31, 2010,annual required payments during the year ending July 31, 2012 representthe outstanding balance on the revolving credit facility since the May 28,2010 amendment to our revolving credit facility extended the expiration datefrom August 1, 2010 to August 1, 2011. In September 2010, werepaid $6,000,000 under the revolving credit facility and $2,500,000 under ourterm loan facility reducing our total outstanding borrowings to $12,500,000 atthe end of September. In October, we borrowed $20,500,000 under our revolvingcredit facility to fund a portion of the purchase price of the GambroAcquisition thereby increasing total outstanding borrowings to $33,000,000. Theremaining purchase price of $3,100,000 is payable in six equal quarterlypayments ending April 2012.

 

(2)                                  The expectedinterest payments under the term and revolving credit facilities reflect interestrates of 2.37% and 1.93%, respectively, which were our interest rates onoutstanding borrowings at July 31, 2010.

 

***Credit facilities***

 

In conjunction with the acquisition of Crosstex, we entered intoamended and restated credit facilities dated as of August 1, 2005 (the “U.S.Credit Facilities”) with a consortium of lenders to fund the cash considerationpaid in the acquisition and costs associated with the acquisition, as well asto modify our existing United States credit facilities. The U.S. Credit Facilities,as amended, include (i) a six-year $40.0 million senior secured amortizingterm loan facility expiring August 1, 2011 and (ii) a five-year $50.0million senior secured revolving credit facility that was scheduled to expireon August 1, 2010. Amounts we repay under the term loan facility may notbe re-borrowed. On May 28, 2010, we amended the U.S. Credit Facilities,which amendment included the extension of the termination date for therevolving credit facility to August 1, 2011. Debt issuance costs relatingto the U.S. Credit Facilities were recorded in other assets and are beingamortized over the life of the credit facilities. Such unamortized debtissuance costs amounted to approximately $297,000 at July 31, 2010.

 

AtSeptember 17, 2010, borrowings under the U.S. Credit Facilities bearinterest at rates ranging from 0.50% to 1.50% above the lender’s base rate, orat rates ranging from 1.50% to 2.50% above the London Interbank Offered Rate (“LIBOR”),depending upon our consolidated ratio of debt to earnings before interest,taxes, depreciation and amortization, and as further adjusted under the termsof the U.S. Credit Facilities (“EBITDA”). At September 17, 2010, thelender’s base rate was 3.25% and the LIBOR rates applicable to our outstanding borrowingsranged from 0.53% to 1.21%. The margins applicable to our outstandingborrowings at September 17, 2010 were 0.50% above the lender’s base rateand 1.50% above LIBOR. The majority of our outstanding borrowings were underLIBOR contracts at September 17, 2010. The U.S. Credit Facilities alsoprovide for fees on the unused portion of our facilities at rates ranging from0.20% to 0.40%, depending upon our consolidated ratio of debt to EBITDA; suchrate was 0.20% at September 17, 2010.

 

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TheU.S. Credit Facilities require us to meet certain financial covenants and aresecured by (i) substantially all of our U.S.-based assets (includingassets of Cantel, Minntech, Mar Cor, Crosstex and Strong Dental) and(ii) our pledge of all of the outstanding shares of Minntech, Mar Cor,Crosstex and Strong Dental and 65% of the outstanding shares of ourforeign-based subsidiaries. Additionally, we are not permitted to pay cashdividends on our Common Stock in excess of $3,000,000 without the consent ofour United States lenders. As of July 31, 2010, we were in compliance withall financial and other covenants under the U.S. Credit Facilities.

 

On July 31, 2010, we had $21,000,000 of outstanding borrowingsunder the U.S. Credit Facilities, which consisted of $10,000,000 and$11,000,000 under the term loan facility and the revolving credit facility,respectively. In September 2010, we repaid $6,000,000 under the revolvingcredit facility and $2,500,000 under our term loan facility reducing our totaloutstanding borrowings to $12,500,000 at the end of September. In October, weborrowed $20,500,000 under our revolving credit facility to fund a portion ofthe purchase price of the Gambro Acquisition.

 

The U.S. Credit Facilities have a termination date of August 1,2011. Although we may repay a portion of our outstanding borrowings throughoutfiscal 2011, we do not presently anticipate paying off the revolving creditfacility in full by its termination date. We are in discussions with our banksyndicate regarding modifications to such facility and expect to formallymodify the facility before the expiration date. However, since any modificationwill not be completed until later in fiscal 2011, we will be required toreclassify the entire outstanding balance of the revolver from long-term tocurrent in periods subsequent to July 31, 2010.

 

***Operating leases***

 

Minimumcommitments under operating leases include minimum rental commitments for ourleased manufacturing facilities, warehouses, office space and equipment.

 

Rentexpense related to operating leases for fiscal 2010 was recorded on astraight-line basis and aggregated $3,875,000, compared with $3,679,000 and$3,466,000 for fiscals 2009 and 2008, respectively.

 

***Deferred compensation***

 

Includedin other long-term liabilities are deferred compensation arrangements forcertain former Minntech directors and officers.

 

***Employment agreements***

 

Wehave previously entered into various employment agreements with executives ofthe Company, including our Corporate executive officers and our subsidiaryChief Executive Officers. The majority of such contracts expired and werereplaced effective January 1, 2010 with severance contracts that definedcertain compensation arrangements relating to various employment terminationscenarios.

 

***Convertible note receivable***

 

InFebruary 2009, we invested an initial $200,000 in a senior subordinatedconvertible promissory note issued by BIOSAFE, Inc. (“BIOSAFE”), inconnection with BIOSAFE’s grant to us of certain exclusive and non-exclusivelicense rights to BIOSAFE’s antimicrobial additive. BIOSAFE is the owner of apatented and proprietary antimicrobial agent that is built into themanufacturing of end-products to achieve long-lasting microbial protection onsuch end-products’ surface. As a result of BIOSAFE’s successful raising of aminimum incremental amount of cash following our investment, we invested anadditional $300,000 in notes of BIOSAFE in January 2010 bringing theaggregate investment in BIOSAFE notes to $500,000, as obligated under ouragreement with BIOSAFE. We are not obligated to invest any additional funds.

 

Thenotes are convertible into a newly-created series of preferred stock ofBIOSAFE. Interest is payable in shares of BIOSAFE stock or in cash. The notesaccrue interest at a per annum rate of 8% until the maturity date of June 30,2011 or earlier exercise. If not paid by the maturity date, interest willaccrue thereafter at a rate of 12% per annum. In connection with  our investment, we entered into a licenseagreement with BIOSAFE under which we will pay BIOSAFE a fixed royaltypercentage of sales of our products containing BIOSAFE’s antimicrobialformulation. This investment, together with the accrued interest, is includedwithin other assets in our Consolidated Balance Sheets at July 31, 2010and 2009. The carrying value of this investment approximates fair value due tothe short maturity of the notes and the relative consistent underlying value ofBIOSAFE.

 

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***Financing needs***

 

Although most of our operating segments generate significant cash fromoperations, our Healthcare Disposables, Dialysis, Water Purification and Filtration and Endoscope Reprocessingsegments are the largest generators of cash. At July 31, 2010, we had acash balance of $22,612,000, of which $8,692,000 was held by foreignsubsidiaries. On September 28, 2010, we repatriated $5,500,000 in earningsfrom one of the foreign subsidiaries thereby reducing their cash balance.

 

We believe that our current cash position, anticipated cash flows fromoperations and the funds available under our revolving credit facility will besufficient to satisfy our cash operating requirements for the foreseeablefuture based upon our existing operations, particularly given that wehistorically have not needed to borrow for working capital purposes. At October 14,2010, $24,500,000 was available under our United States revolving creditfacility, which expires on August 1, 2011.

 

Under the terms of our credit facilities we are limited to the amountof aggregate purchase price we pay for acquisitions during the duration of thecredit agreement without obtaining prior bank approval. As a result of the May 28,2010 amendment to our U.S. Credit Facilities, the aggregate purchase pricepermitted for future acquisitions without obtaining prior bank approval wasreset to $50,000,000, of which $2,014,000 and $23,750,000 was used for theacquisitions of Purity and Gambro Water, respectively.

 

***Foreign currency***

 

In fiscal 2010, compared with fiscal 2009, the average value of theCanadian dollar increased by approximately 10.3% relative to the value of theUnited States dollar. Additionally, at July 31, 2010 compared with July 31,2009, the value of the Canadian dollar relative to the value of the UnitedStates dollar increased by approximately 4.7%. The financial statements of ourCanadian subsidiaries are translated using the accounting policies described inNote 2 of the Consolidated Financial Statements and therefore are impacted bychanges in the Canadian dollar exchange rate. Additionally, changes in thevalue of the Canadian dollar against the United States dollar affected ourresults of operations because a portion of our Canadian subsidiaries’ inventoriesand operating costs (which are reported in the Water Purification andFiltration and Specialty Packaging segments) are purchased in the United Statesand a significant amount of their sales are to customers in the United States.

 

In fiscal 2010, compared with fiscal 2009 the average value of the euroincreased by approximately 1.7% relative to the value of the United Statesdollar. Additionally, at July 31, 2010 compared with July 31, 2009,the value of the euro relative to the United States dollar decreased byapproximately 7.2%. The financial statements of our Netherlands subsidiary aretranslated using the accounting policies described in Note 2 of theConsolidated Financial Statements and therefore are impacted by changes in theeuro exchange rate relative to the United States dollar. Additionally, changesin the value of the euro against the United States dollar affect our results ofoperations because a portion of the net assets of our Netherlands subsidiary(which are reported in our Dialysis, Endoscope Reprocessing and WaterPurification and Filtration segments) are denominated and ultimately settled inUnited States dollars but must be converted into its functional euro currency.Furthermore, as part of the restructuring of our Netherlands subsidiary, asdescribed in Note 18 to the Consolidated Financials and elsewhere in thisMD&A, certain cash bank accounts, accounts receivable and liabilities ofour United States subsidiaries, Minntech and Mar Cor, are now denominated andultimately settled in euros or British pounds but must be converted into ourfunctional United States currency.

 

In order to hedge against the impact of fluctuations in the value of (i) theCanadian dollar relative to the United States dollar, (ii) the eurorelative to the United States dollar and (iii) the British pound relativeto the United States dollar on the conversion of such net assets into thefunctional currencies, we enter into short-term contracts to purchase Canadiandollars, euros and British pounds forward, which contracts are generally onemonth in duration. These short-term contracts are designated as fair valuehedges. There were three foreign currency forward contracts with an aggregatevalue of $3,281,000 at September 17, 2010, which cover certain assets andliabilities that were denominated in currencies other than our subsidiaries’functional currencies. Such contracts expired on September 30, 2010. Theseforeign currency forward contracts are continually replaced with new one-monthcontracts as long as we have significant net assets at our subsidiaries thatare denominated and ultimately settled in currencies other than theirfunctional currencies. Under our credit facilities, such contracts to purchaseCanadian dollars, euros and British pounds may not exceed $12,000,000 in anaggregate notional amount at any time. In accordance with ASC 815, *“Derivatives and Hedging”* (“ASC 815”), such foreign currencyforward contracts are designated as hedges. Gains and losses related to thesehedging contracts to buy Canadian dollars, euros and British pounds forward areimmediately realized within general and administrative expenses due to theshort-term nature of such contracts. In fiscal 2010, such forward contractspartially offset the impact on operations related to certain assets andliabilities that are denominated in currencies other than our subsidiaries’functional currencies.

 

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Changes in the value of the Japanese yen relative to the United Statesdollar in fiscal 2010, compared with fiscal 2009, did not have a significantimpact upon either our results of operations or the translation of our balancesheet, primarily due to the fact that our Japanese subsidiary accounts for arelatively small portion of consolidated net sales, net income and net assets.

 

Overall, fluctuations in the rates of currency exchange had an adverseimpact in fiscal 2010, compared with fiscal 2009, upon our net income of approximately $258,000 primarily due to theincrease in the value of the Canadian dollar relative to the United Statesdollar.

 

For purposes of translating the balance sheet at July 31, 2010compared with July 31, 2009, the total of the foreign currency movementsresulted in a foreign currency translation gain of $1,067,000 in fiscal 2010,but was reduced to an overall loss of $236,000 due to a tax adjustment relatingto foreign repatriations, thereby decreasing stockholders’ equity.

 

***Inflation***

 

Infiscal 2010, inflation did not have a significant impact on our operations. However,our businesses can be adversely impacted by rising fuel and oil prices and areheavily reliant on certain raw materials, such as chemicals, paper pulp, resin,stainless steel and plastic components. From time to time, we experience priceincreases for raw materials. If we are unable to implement price increases toour customers, our gross margins could be adversely affected.

 

**CriticalAccounting Policies**

 

Our discussion and analysis of our financial condition and results ofoperations are based upon our Consolidated Financial Statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an ongoing basis, we continually evaluate our estimates. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates.

 

We believe the following critical accounting policies affect our moresignificant judgments and estimates used in the preparation of our ConsolidatedFinancial Statements.

 

***RevenueRecognition***

 

Revenue on product sales is recognized as products are shipped tocustomers and title passes. The passing of title is determined based upon theFOB terms specified for each shipment. With respect to dialysis, therapeutic,specialty packaging, chemistries and endoscope reprocessing products, shipmentterms are generally FOB origin for common carrier and FOB destination when ourdistribution fleet is utilized (except for one large customer in dialysiswhereby all products are shipped FOB destination). With respect to waterpurification and filtration and healthcare disposable products, shipment termsmay be either FOB origin or destination. Customer acceptance for the majorityof our product sales occurs at the time of delivery. In certain instances,primarily with respect to some of our water purification and filtrationequipment, endoscope reprocessing equipment and an insignificant amount of oursales of dialysis equipment, post-delivery obligations such as installation,in-servicing or training are contractually specified; in such instances,revenue recognition is deferred until all of such conditions have beensubstantially fulfilled such that the products are deemed functional by theend-user. With respect to a portion of water purification and filtrationproduct sales, equipment is sold as part of a system for which the equipment isfunctionally interdependent or the customer’s purchase order specifies “ship-complete”as a condition of delivery; revenue recognition on such sales is deferred untilall equipment has been delivered.

 

A portion of our water purification and filtration and endoscopereprocessing sales are recognized as multiple element arrangements, wherebyrevenue is allocated to the equipment, installation and service componentsbased upon vendor specific objective evidence, which includes comparablehistorical transactions of similar equipment and installation sold as standalone components.

 

Revenueon service sales is recognized when repairs are completed at the customer’slocation or when repairs are completed at our facilities and the products areshipped to customers. With respect to certain service contracts in ourEndoscope Reprocessing and Water Purification and Filtration operatingsegments, service revenue is recognized on a 

 

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straight-linebasis over the contractual term of the arrangement. All shipping and handlingfees invoiced to customers, such as freight, are recorded as revenue (andrelated costs are included within cost of sales) at the time the sale isrecognized.

 

Noneof our sales contain right-of-return provisions. Customer claims for credit orreturn due to damage, defect, shortage or other reason must be pre-approved byus before credit is issued or such product is accepted for return. No cashdiscounts for early payment are offered except with respect to a small portionof our sales of dialysis, healthcare disposable and water purification andfiltration products and certain prepaid packaging products. We do not offerprice protection, although advance pricing contracts or required notice periodsprior to implementation of price increases exist for certain customers withrespect to many of our products. With respect to certain of our dialysis,dental, water purification and filtration and endoscope reprocessing customers,volume rebates are provided; such volume rebates are provided for as areduction of sales at the time of revenue recognition and amounted to$2,909,000, $2,461,000 and $1,757,000 in fiscals 2010, 2009 and 2008,respectively. The increase in volume rebates in fiscal 2010 compared withfiscal 2009 is primarily due to increased sales volume primarily in ourHealthcare Disposables and Endoscope Reprocessing segments. The increase involume rebates in fiscal 2009 compared with fiscal 2008 is primarily due to newterms in a renewed rebate arrangement with a major dental distributor in ourHealthcare Disposables segment. Such allowances are determined based onestimated projections of sales volume for the entire rebate periods. If itbecomes known that sales volume to customers will deviate from originalprojections, the volume rebate provisions originally established would beadjusted accordingly.

 

Themajority of our dialysis products are sold to end-users; the majority oftherapeutic filtration products and healthcare disposable products are sold tothird party distributors; water purification and filtration products andservices are sold directly and through third-party distributors to hospitals,dialysis clinics, pharmaceutical and biotechnology companies and otherend-users; our endoscope reprocessing products and services are sold primarilyto distributors internationally and directly to hospitals and other end-usersin the United States; specialty packaging products are sold to third-partydistributors, medical research companies, laboratories, pharmaceuticalcompanies, hospitals, government agencies and other end-users; and chemistriesproducts and services are sold to medical products and service companies,laboratories, pharmaceutical companies, hospitals and other end-users. Sales toall of these customers follow our revenue recognition policies.

 

***Accounts Receivable and Allowance for DoubtfulAccounts***

 

Accounts receivable consist of amounts due to us from normal businessactivities. Allowances for doubtful accounts are reserves for the estimatedloss from the inability of customers to make required payments. We usehistorical experience as well as current market information in determining theestimate. While actual losses have historically been within management’sexpectations and provisions established, if the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. Alternatively, if certaincustomers paid their delinquent receivables, reductions in allowances may berequired.

 

***Inventories***

 

Inventories consist of raw materials, work-in-process and finishedproducts which are sold in the ordinary course of our business and are statedat the lower of cost (first-in, first-out) or market. In assessing the value ofinventories, we must make estimates and judgments regarding reserves requiredfor product obsolescence, aging of inventories and other issues potentiallyaffecting the saleable condition of products. In performing such evaluations,we use historical experience as well as current market information. With fewexceptions, the saleable value of our inventories has historically been withinmanagement’s expectation and provisions established, however, rapid changes inthe market due to competition, technology and various other factors could havean adverse effect on the saleable value of our inventories, resulting in theneed for additional reserves.

 

***Goodwill and Intangible Assets***

 

Certain of our identifiable intangible assets, including customerrelationships, technology, brand names, non-compete agreements and patents, areamortized using the straight-line method over their estimated useful liveswhich range from 3 to 20 years. Additionally, we have recorded goodwill andtrademarks and trade names, all of which have indefinite useful lives and aretherefore not amortized. All of our intangible assets and goodwill are reviewedfor impairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable, and goodwill and intangible assetswith indefinite lives are reviewed for impairment at least annually*.*Our management is primarily responsiblefor determining if impairment exists and considers a number of factors,including third-party valuations, when making these determinations. Inperforming a review for goodwill impairment, management uses a two-step processthat begins with an estimation of the fair value of the related operatingsegments by using average fair value results of the market multiple and

 

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discounted cash flow methodologies, as well as the comparabletransaction methodology when applicable. The first step is a review forpotential impairment, and the second step measures the amount of impairment, ifany. In performing our annual review for indefinite lived intangibles,management compares the current fair value of such assets to their carryingvalues. With respect to amortizable intangible assets when impairmentindicators are present, management would determine whether expected futurenon-discounted cash flows would be sufficient to recover the carrying value ofthe assets; if not, the carrying value of the assets would be adjusted to theirfair value. On July 31, 2010, management concluded that none of ourintangible assets or goodwill was impaired.

 

While the results of these annual reviews have historically notindicated impairment, impairment reviews are highly dependent on management’s projectionsof our future operating results and cash flows (which management believes to bereasonable), discount rates based on the Company’s weighted-average cost ofcapital and appropriate benchmark peer companies. Assumptions used indetermining future operating results and cash flows include current andexpected market conditions and future sales forecasts. Subsequent changes inthese assumptions and estimates could result in future impairment. Although weconsistently use the same methods in developing the assumptions and estimatesunderlying the fair value calculations, such estimates are uncertain by natureand can vary from actual results. At July 31, 2010, the average fair valueof all of our reporting units exceeded book value by substantial amounts,except our Specialty Packaging segment, which had an average fair value thatexceeded book value by approximately 16%.

 

***Long-Lived Assets***

 

Weevaluate the carrying value of long-lived assets including property, equipmentand other assets whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. An assessment is made to determine ifthe sum of the expected future non-discounted cash flows from the use of theassets and eventual disposition is less than the carrying value. If the sum ofthe expected non-discounted cash flows is less than the carrying value, animpairment loss is recognized based on fair value. With few exceptions, ourhistorical assessments of our long-lived assets have not differed significantlyfrom the actual amounts realized. However, the determination of fair valuerequires us to make certain assumptions and estimates and is highly subjective,and accordingly, actual amounts realized may differ significantly from ourestimates.

 

***Warranties***

 

We provide for estimated costs that may be incurred to remedydeficiencies of quality or performance of our products at the time of revenuerecognition. Most of our products have a one year warranty, although a majorityof our endoscope reprocessing equipment in the United States carries a warrantyperiod of up to fifteen months. We record provisions for product warranties asa component of cost of sales based upon an estimate of the amounts necessary tosettle existing and future claims on products sold. The historical relationshipof warranty costs to products sold is the primary basis for the estimate. Asignificant increase in third party service repair rates, the cost andavailability of parts or the frequency of claims could have a material adverseimpact on our results for the period or periods in which such claims oradditional costs materialize. Management reviews its warranty exposureperiodically and believes that the warranty reserves are adequate; however,actual claims incurred could differ from original estimates, requiringadjustments to the reserves.

 

***Stock-Based Compensation***

 

Forfiscal 2005 and earlier periods, we accounted for stock options using theintrinsic value method under which stock compensation expense was notrecognized because we granted stock options with exercise prices equal to themarket value of the shares at the date of grant. Beginning August 1, 2005,we accounted for stock options under ASC 718 using the modified prospectivemethod for the transition. Under the modified prospective method, stockcompensation expense is recognized for any option grant or stock award grantedon or after August 1, 2005, as well as the unvested portion of stockoptions granted prior to August 1, 2005, based upon the award’s fairvalue.

 

Most of our stock options and stock awards (which consist only ofrestricted stock) are subject to graded vesting in which portions of the awardvest at different times during the vesting period, as opposed to awards thatvest at the end of the vesting period. We recognize compensation expense forawards subject to graded vesting using the straight-line basis, reduced byestimated forfeitures. Forfeitures are estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures are estimated based on historical experience.

 

Thestock-based compensation expense recorded in our Consolidated FinancialStatements may not be representative of the effect of stock-based compensationexpense in future periods due to the level of awards issued in past

 

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years(which level may not be similar in the future), modifications to existingawards and assumptions used in determining fair value, expected lives and estimatedforfeitures. We determine the fair value of each stock award using the closingmarket price of our Common Stock on the date of grant. We estimate the fairvalue of each option grant on the date of grant using the Black-Scholes optionvaluation model. The determination of fair value using an option-pricing modelis affected by our stock price as well as assumptions regarding a number ofsubjective variables. These variables include, but are not limited to, theexpected stock price volatility over the term of the expected option life(which is determined by using the historical closing prices of our CommonStock), the expected dividend yield (which historically has been 0% and is nowapproximately 0.6% as we began paying dividends in January 2010), and theexpected option life (which is based on historical exercise behavior). Iffactors change and we employ different assumptions in future periods, thecompensation expense that we would record may differ significantly from what wehave recorded in the current period.

 

***Legal Proceedings***

 

In the normal course of business, we are subject to pending andthreatened legal actions. It is our policy to accrue for amounts related tothese legal matters if it is probable that a liability has been incurred and anamount of anticipated exposure can be reasonably estimated. We do not believethat any of these pending claims or legal actions will have a material adverseeffect on our business, financial condition, results of operations or cashflows.

 

***Income******Taxes***

 

We recognize deferred tax assets and liabilities based on differencesbetween the financial statement carrying amounts and the tax basis of assetsand liabilities. Deferred tax assets and liabilities also include itemsrecorded in conjunction with the purchase accounting for business acquisitions.We regularly review our deferred tax assets for recoverability and establish avaluation allowance, if necessary, based on historical taxable income,projected future taxable income, and the expected timing of the reversals ofexisting temporary differences. Although realization is not assured, managementbelieves it is more likely than not that the recorded deferred tax assets, asadjusted for valuation allowances, will be realized. Additionally, deferred taxliabilities are regularly reviewed to confirm that such amounts areappropriately stated. A review of our deferred tax items considers known futurechanges in various effective tax rates, principally in the United States. Ifthe effective tax rate were to change in the future, particularly in the UnitedStates and to a lesser extent Canada, our items of deferred tax could bematerially affected. All of such evaluations require significant managementjudgments.

 

We record liabilities for an unrecognized tax benefit when a taxbenefit for an uncertain tax position is taken or expected to be taken on a taxreturn, but is not recognized in our Consolidated Financial Statements becauseit does not meet the more-likely-than-not recognition threshold that theuncertain tax position would be sustained upon examination by the applicabletaxing authority. The majority of such unrecognized tax benefits originatedfrom acquisitions and are based primarily upon management’s assessment ofexposure associated with acquired companies. Previously, any adjustments uponresolution of income tax uncertainties that predate or result from acquisitionswere recorded as an increase or decrease to goodwill. On August 1, 2009,we adopted ASC 805, which requires the resolution of income tax uncertaintiesthat predate or result from acquisitions to be recognized in our results ofoperations beginning with fiscal 2010. Unrecognized tax benefits are analyzedperiodically and adjustments are made as events occur to warrant adjustment tothe related liability.

 

***BusinessCombinations***

 

Acquisitions require significant estimates and judgments related to thefair value of assets acquired and liabilities assumed.

 

Certain liabilities and reserves are subjective in nature. We reflectsuch liabilities and reserves based upon the most recent information available.In conjunction with our acquisitions, such subjective liabilities and reservesprincipally include certain income tax and sales and use tax exposures,including tax liabilities related to our foreign subsidiaries, as well asreserves for accounts receivable, inventories and warranties. The ultimatesettlement of such liabilities may be for amounts which are different from theamounts recorded.

 

***Costs Associated with Exit or Disposal Activities***

 

Werecognize costs associated with exit or disposal activities, such as costs toterminate a contract, the exit or disposal of a business, or the earlytermination of a leased property, by recognizing the liability at fair valuewhen incurred, except for certain one-time termination benefits, such asseverance costs, for which the period of recognition begins when a severanceplan is communicated to employees.

 

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Inherentin the calculation of liabilities relating to exit and disposal activities aresignificant management judgments and estimates, including estimates oftermination costs, employee attrition and the interest rate used to discountcertain expected net cash payments. Such judgments and estimates are reviewedby us on a regular basis. The cumulative effect of a change to a liabilityresulting from a revision to either timing or the amount of estimated cashflows is recognized by us as an adjustment to the liability in the period ofthe change.

 

Althoughwe have historically recorded minimal charges associated with exit or disposalactivities, we recorded charges associated with exit or disposal activities infiscals 2009 and 2008 relating to our restructuring plan for our Netherlandsmanufacturing operations, as further described in our MD&A and Note 18 tothe Consolidated Financial Statements.

 

***Other Matters***

 

Wedo not have any off balance sheet financial arrangements, other than futurecommitments under operating leases and employment and license agreements.

 

**Item 7A.****                ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK****.**

 

**Foreign Currency and Market Risk**

 

A portion of our products in all of our business segments are exportedto and imported from a variety of geographic locations, and our business couldbe materially and adversely affected by the imposition of trade barriers,fluctuations in the rates of exchange of various currencies, tariff increasesand import and export restrictions, affecting all of such geographies includingbut not limited to the United States, Canada, the European Union, the UnitedKingdom and the Far East.

 

A portion of our Canadian subsidiaries’ inventories and operating costs(which are reported in the Water Purification and Filtration and SpecialtyPackaging segments) are purchased in the United States and a significant amountof their sales are to customers in the United States. The businesses of ourCanadian subsidiaries could be materially and adversely affected by the impositionof trade barriers, fluctuations in the rate of currency exchange, tariffincreases and import and export restrictions between the United States andCanada. Changes in the value of the Canadian dollar against the United Statesdollar also affect our results of operations because certain net assets of ourCanadian subsidiaries are denominated and ultimately settled in United Statesdollars but must be converted into their functional currency. Additionally, thefinancial statements of our Canadian subsidiaries are translated using theaccounting policies described in Note 2 to the Consolidated FinancialStatements. Fluctuations in the rates of currency exchange between the UnitedStates dollar and the Canadian dollar had an overall adverse impact in fiscal2010, compared with fiscal 2009, upon our net income and stockholders’ equity,as described in our MD&A.

 

Changes in the value of the euro against the United States dollaraffect our results of operations because a portion of the net assets of our Netherlandssubsidiary (which are reported in our Dialysis and Endoscope Reprocessingsegments) are denominated and ultimately settled in United States dollars butmust be converted into its functional euro currency. Furthermore, as part ofthe restructuring of our Netherlands subsidiary, as described in Note 18 to theConsolidated Financials and elsewhere in this MD&A, certain cash bankaccounts, accounts receivable and liabilities of our United Statessubsidiaries, Minntech and Mar Cor, are now denominated and ultimately settledin euros or British pounds but must be converted into our functional UnitedStates currency. Additionally, the financial statements of our Netherlandssubsidiary are translated using the accounting policies described in Note 2 tothe Consolidated Financial Statements. Fluctuations in the rates of currencyexchange between the United States dollar and the euro or British pound did nothave a significant overall impact in fiscal 2010, compared with fiscal 2009,upon our net income and stockholders’ equity.

 

Inorder to hedge against the impact of fluctuations in the value of (i) theCanadian dollar relative to the United States dollar, (ii) the eurorelative to the United States dollar and (iii) the British pound relativeto the United States dollar on the conversion of such net assets intofunctional currencies, we enter into short-term contracts to purchase Canadiandollars, euros and British pounds forward, which contracts are generally onemonth in duration. These short-term contracts are designated as fair valuehedges. There were three foreign currency forward contracts with an aggregatevalue of $4,254,000 at July 31, 2010, which covered certain assets andliabilities that were denominated in currencies other than our subsidiaries’ functionalcurrencies. Such contracts expired on August 31, 2010. These foreigncurrency forward contracts are continually replaced with new one-monthcontracts as long as we have significant net assets at our subsidiaries thatare denominated and ultimately settled in currencies other than theirfunctional currencies. Under our credit facilities, such contracts to purchaseCanadian dollars, euros and British pounds may not exceed $12,000,000 in anaggregate notional amount at any time. In 

 

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fiscal2010, such forward contracts partially offset the impact on operations relatedto certain assets and liabilities that are denominated in currencies other thanour subsidiaries’ functional currencies.

 

The functional currency of Minntech’s Japan subsidiary is the Japaneseyen. Changes in the value of the Japanese yen relative to the United Statesdollar in fiscal 2010, compared with fiscal 2009, did not have a significantimpact upon either our results of operations or the translation of the balancesheet, primarily due to the fact that our Japanese subsidiary accounts for arelatively small portion of consolidated net sales, net income and net assets.

 

Overall, fluctuations in the rates of currency exchange had an adverseimpact on our net income in fiscal 2010, compared with fiscal 2009, primarilydue to the increase in the value of the Canadian dollar relative to the UnitedStates dollar, and a favorable impact upon stockholders’ equity, as describedin our MD&A.

 

**Interest Rate Market Risk**

 

Wehave a United States credit facility for which the interest rate on outstandingborrowings is variable. Substantially all of our outstanding borrowings areunder LIBOR contracts. Therefore, interest expense is affected by the generallevel of interest rates in the United States as well as LIBOR interest rates.

 

Additionally,we amended our U.S. Credit facilities on May 28, 2010. Due to currentmarket conditions, the modification of our credit facilities resulted in anincrease of our margins above the lender’s base rate and LIBOR, which wouldadversely affect our results of operations in the future if levels ofoutstanding borrowings increase significantly.

 

**MarketRisk Sensitive Transactions**

 

Weare exposed to market risks arising principally from adverse changes ininterest rates and foreign currency.

 

Withrespect to interest rate risk, our outstanding debt is under our United Statescredit facilities, described elsewhere in Liquidity and Capital Resources. Suchcredit facilities consist of outstanding debt with fixed repayment amounts atprevailing market rates of interest, principally under LIBOR contracts rangingfrom one to twelve months. Therefore, our market risk with respect to such debtis the increase in interest expense which would result from higher interestrates associated with LIBOR. Such outstanding debt under our United Statescredit facilities was $21,000,000 and $43,300,000 at July 31, 2010 and2009, respectively, and the average outstanding balance during fiscal 2010 and2009 was approximately $32,000,000 and $53,000,000, respectively. Duringfiscals 2010 and 2009, the weighted average interest rate on outstanding debtwas 2.55% and 3.94%, respectively. A 100 basis-point increase in average LIBORinterest rates would have resulted in incremental interest expense ofapproximately $317,000 and $526,000 during fiscals 2010 and 2009, respectively.However, substantially all of our outstanding borrowings were under LIBORcontracts at July 31, 2010 that have expiration dates ranging from 3 to 12months; therefore, we are substantially protected throughout most of fiscal2011 from any exposure associated with increasing LIBOR rates, assuming debtlevels remain constant.

 

Ourother long-term liabilities would not be materially affected by an increase ininterest rates. We also maintained a cash balance of $22,612,000 at July 31,2010 which is either maintained in cash or invested in low risk and low returncash equivalents such as short-term guaranteed investment certificates issuedby various Canadian banks and United States money market funds with leadingbanking institutions. An increase in interest rates would generate additionalinterest income for us from these low risk cash equivalents, which wouldpartially offset the adverse impact of the additional interest expense.

 

Withrespect to foreign currency exchange rates, we are principally impacted bychanges in the Canadian dollar, euro and British pound as these currenciesrelate to the United States dollar. We use a sensitivity analysis to assess themarket risk associated with our foreign currency transactions. Market risk isdefined here as the potential change in fair value resulting from an adversemovement in foreign currency exchange rates.

 

Our Canadian subsidiaries and Netherlands subsidiary have net assets incurrencies (principally United States dollars) other than their functionalCanadian and Euro currency, which must be converted into its functionalcurrency, thereby giving rise to realized foreign exchange gains and losses.Similarly, our United States subsidiaries have net assets in currencies(principally euros and British pounds) other than their functional UnitedStates currency, which must be converted into its functional currency, therebygiving rise to realized foreign exchange gains and losses. Therefore, ourCanadian subsidiaries, Netherlands subsidiary and United States subsidiariesare exposed to risk if the value of the Canadian dollar, euro and British poundappreciates relative to the United States dollar. For fiscals 2010 and 2009, auniform 15% increase in the Canadian dollar, euro and British pound relative tothe United States dollar would have resulted in aggregate realized losses(after tax) of approximately $420,000 and $350,000, respectively. However,since certain of our subsidiaries use 

 

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foreigncurrency forward contracts to hedge against the impact of fluctuations of theCanadian dollar, euro and British pound relative to the United States dollar,realized losses relating to the fluctuation of those currencies would bepartially offset by gains on the foreign currency forward contracts.

 

Inaddition to the above, adverse changes in foreign currency exchange ratesimpact the translation of our financial statements. For fiscals 2010 and 2009,a uniform 15% adverse movement in foreign currency rates would have resulted inrealized losses (after tax) of approximately $620,000 and $880,000,respectively, due to the translation of the results of operations of foreignsubsidiaries (adverse changes would be caused by appreciation of either theCanadian dollar or the euro relative to the United States dollar). However,such a change in foreign currency rates would have resulted in an unrealizedgain on our net investment in foreign subsidiaries of $3,867,000 and $2,648,000in fiscals 2010 and 2009, respectively. Such an unrealized gain would berecorded in accumulated other comprehensive income in our stockholders’ equity.Conversely, if the Canadian dollar and the euro depreciated by 15% relative tothe United States dollar, we would have recognized realized gains (after tax)of approximately $620,000 and $880,000 in fiscals 2010 and 2009, respectively,and unrealized losses of $3,867,000 and $2,648,000 in fiscals 2010 and 2009,respectively, on our net investment in foreign subsidiaries. However, since weview these investments as long-term, we would not expect such unrealized lossesto be realized in the near term.

 

Theaggregate adverse impact, net of tax, to our results of operations of a uniform15% increase in foreign currency exchange rates, as described above, due toboth financial statement translation and functional currency conversion wouldhave been $1,040,000 and $1,230,000 for fiscals 2010 and 2009, respectively,partially offset by the affect of our foreign currency forward contracts.

 

**Item 8.****                   ****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA****.**

 

SeeIndex to Consolidated Financial Statements, which is Item 15(a), and theConsolidated Financial Statements and schedule included in this Report.

 

**Item 9.****                   ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**.

 

Notapplicable.

 

**Item 9A.****                ****CONTROLS AND PROCEDURES**.

 

Under the supervision and with the participation of our Chief ExecutiveOfficer and our Chief Financial Officer, we conducted an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of July 31, 2010. Based on this evaluation, our ChiefExecutive Officer and Chief Financial Officer each concluded that the designand operation of these disclosure controls and procedures were, as of the endof the period covered by this report, effective and designed to ensure thatmaterial information relating to the Company, including our consolidatedsubsidiaries, required to be disclosed in our SEC reports is (i) recorded,processed, summarized and reported within the time periods specified by the SECand (ii) accumulated and communicated to the Company’s management,including the Chief Executive Officer and the Chief Financial Officer, asappropriate to allow timely decisions regarding disclosure.

 

**Management’s Report on Internal Control over Financial Reporting**

 

The management of Cantel Medical Corp. is responsible for establishingand maintaining adequate internal control over financial reporting for theCompany. The Company’s internal control over financial reporting is designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith United States generally accepted accounting principles. The Company’sinternal control over financial reporting includes those policies andprocedures that:

 

(i)            pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company,

 

(ii)           providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company, and

 

(iii)          providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

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Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of the effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in condition, or that thedegree of compliance with the policies and procedures included in such controlsmay deteriorate.

 

We,under the supervision and with the participation of our Chief Executive Officerand our Chief Financial Officer, carried out an evaluation of the effectivenessof our internal controls over financial reporting based on the framework andcriteria established in “Internal Control — Integrated Framework,” issued bythe Committee of Sponsoring Organizations of the Treadway Commission. Based onthat evaluation, the Chief Executive Officer and the Chief Financial Officereach concluded that our internal control over financial reporting was effectiveas of July 31, 2010.

 

Ourindependent auditors, Ernst & Young LLP, have issued an attestationreport on our internal control over financial reporting, which is includedbelow.

 

**Changesin Internal Control**

 

Wehave evaluated our internal controls over financial reporting and determinedthat no changes occurred during the period covered by this report that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting, except as described below.

 

OnJune 1, 2010, we acquired Purity as more fully described in Note 3 to theConsolidated Financial Statements. During the initial transition periodfollowing this acquisition, we have enhanced our internal control process atour Mar Cor Purification subsidiary to ensure that all financial informationrelated to this acquisition is properly reflected in our Consolidated FinancialStatements. During the first quarter of our fiscal 2011, we expect that allaspects of this acquisition will be fully integrated into Mar Cor’s existinginternal control structure.

 

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**AttestationReport of Independent Registered Public Accounting Firm**

 

**Report of Independent Registered Public Accounting Firm**

 

TheBoard of Directors and Shareholders

CantelMedical Corp.

 

Wehave audited Cantel Medical Corp.’s internal control over financial reportingas of July 31, 2010, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Cantel MedicalCorp.’s management is responsible for maintaining effective internal controlover financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’sReport on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on the company’s internal control over financial reportingbased on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, Cantel Medical Corp maintained, in all material respects,effective internal control over financial reporting as of July 31, 2010,based on****the COSO criteria**.**

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofCantel Medical Corp. as of July 31, 2010 and 2009 and the relatedconsolidated statements of income, shareholders’ equity and cash flows for eachof the three years in the period ended July 31, 2010 of Cantel MedicalCorp. and our report dated October 14, 2010 expressed an unqualifiedopinion thereon.

 
|                   | /s/  Ernst & Young LLP |
|------------------------|---------------------------------|
|                   |                            |
|                   |                            |
| MetroPark,  New Jersey |                            |
| October 14,  2010 |                            |

 

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**Item 9B.****                ****OTHER INFORMATION**.

 

None.

 

**PART III**

 

**Item 10.****                ****DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE****.**

 

Incorporatedby reference to the Registrant’s definitive proxy statement to be filed withthe SEC pursuant to Regulation 14A promulgated under the Exchange Act inconnection with the 2010 Annual Meeting of Stockholders of the Registrant,except for the following:

 

Wehave adopted a Code of Ethics for the Chief Executive Officer, the ChiefFinancial Officer and other officers and management personnel that is posted onour website, www.cantelmedical.com. We intend to satisfy the disclosurerequirement regarding any amendment to, or a waiver of, a provision of the Codeof Ethics for the Chief Executive Officer, Chief Financial Officer and other officersand management personnel by posting such information on our website.

 

**Item 11.****                ****EXECUTIVE COMPENSATION****.**

 

Incorporatedby reference to the Registrant’s definitive proxy statement to be filed withthe SEC pursuant to Regulation 14A promulgated under the Exchange Act inconnection with the 2010 Annual Meeting of Stockholders of the Registrant.

 

**Item 12.****                ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS****.**

 

Incorporated by reference to the Registrant’s definitive proxystatement to be filed with the SEC pursuant to Regulation 14A promulgated underthe Exchange Act in connection with the 2010 Annual Meeting of Stockholders ofthe Registrant, except for the following:

 

The following table shows, as of July 31, 2010, the number of optionsor nonvested restricted shares currently outstanding, as well as the number ofshares remaining available for grant under our existing equity plans. Nofurther grants may be made from the 1997 Employee Stock Option Plan or 1998Directors’ Stock Option Plan. For these plans, therefore, the table shows onlythe number of options outstanding:

 
| ** **                                      | ** ** | **Outstanding** | ** ** | **Nonvested**              | ** ** | **Available**      | ** ** |
|-------------------------------------------------|------------|-----------------|------------|----------------------------|------------|--------------------|------------|
| **Plan**                                        | ** ** | **Options**     | ** ** | **Restricted Shares** | ** ** | **for Grant** | ** ** |
|                                            |       |            |       |                       |       |               |       |
| 2006 Equity Incentive Plan  - Options           |       | 922,362         |       | —                     |       | 193,583            |       |
| 2006  Equity Incentive Plan - Restricted Shares |       | —          |       | 158,652                    |       | 462,096            |       |
| 1997  Employee Stock Option Plan                |       | 477,751         |       | —                     |       | —             |       |
| 1998  Directors’ Stock Option Plan         |       | 27,750          |       | —                     |       | —             |       |
|                                            |       | 1,427,863       |       | 158,652                    |       | 655,679            |       |

 

**Item 13.****                ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**.

 

Incorporated by reference to the Registrant’s definitive proxystatement to be filed with the SEC pursuant to Regulation 14A promulgated underthe Exchange Act in connection with the 2010 Annual Meeting of Stockholders ofthe Registrant.

 

**Item 14.****                ****PRINCIPAL ACCOUNTING FEES AND SERVICES**.

 

Incorporated by reference to the Registrant’s definitive proxystatement to be filed with the SEC pursuant to Regulation 14A promulgated underthe Exchange Act in connection with the 2010 Annual Meeting of Stockholders ofthe Registrant.

 

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**PART IV**

 

**Item 15.****                ****EXHIBITS, FINANCIAL STATEMENT SCHEDULES****.**

 

(a)           The followingdocuments are filed as part of this Annual Report on Form 10-K for the fiscalyear ended July 31, 2010.

 

1.           ConsolidatedFinancial Statements:

 

(i)            Report ofIndependent Registered Public Accounting Firm.

 

(ii)           ConsolidatedBalance Sheets as of July 31, 2010 and 2009.

 

(iii)          ConsolidatedStatements of Income for the years ended July 31, 2010, 2009 and 2008.

 

(iv)          ConsolidatedStatements of Changes in Stockholders’ Equity and Comprehensive Income for theyears ended July 31, 2010, 2009 and 2008.

 

(v)           ConsolidatedStatements of Cash Flows for the years ended July 31, 2010, 2009 and 2008.

 

(vi)          Notes toConsolidated Financial Statements.

 

2.           ConsolidatedFinancial Statement Schedules:

 

(i)            Schedule II -Valuation and Qualifying Accounts for the years ended July 31, 2010, 2009 and2008.

 

All other financial statement schedules are omitted since they are notrequired, not applicable, or the information has been included in theConsolidated Financial Statements or Notes thereto.

 

  3.           Exhibits:

 

3(a) - Registrant’s Restated Certificate of Incorporation dated July20, 1978. (Incorporated herein by reference to Exhibit 3(a) to Registrant’s1981 Annual Report on Form 10-K.)

 

3(b) - Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on February 16, 1982. (Incorporated herein by reference toExhibit 3(b) to Registrant’s 1982 Annual Report on Form 10-K.)

 

3(c) - Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on May 4, 1984. (Incorporated herein by reference to Exhibit3(c) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended April30, 1984.)

 

3(d) - Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on August 19, 1986. (Incorporated herein by reference toExhibit 3(d) to Registrant’s 1986 Annual Report on Form 10-K.)

 

3(e) - Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on December 12, 1986. (Incorporated herein by reference toExhibit 3(e) to Registrant’s 1987 Annual Report on Form 10-K [the “1987 10-K”].)

 

3(f) - Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on April 3, 1987. (Incorporated herein by reference toExhibit 3(f) to Registrant’s 1987 10-K.)

 

3(g) - Certificate of Change of Registrant, filed on July 12, 1988.(Incorporated herein by reference to Exhibit 3(g) to Registrant’s 1988 AnnualReport on Form 10-K.)

 

3(h) - Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on April 17, 1989. (Incorporated herein by reference toExhibit 3(h) to Registrant’s 1989 Annual Report on Form 10-K.)

 

3(i) — Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on May 10, 1999. (Incorporated herein by reference to Exhibit3(i) to Registrant’s 2000 Annual Report on Form 10-K [the “2000 10-K”].)

 

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3(j) — Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on April 5, 2000. (Incorporated herein by reference toExhibit 3(j) to Registrant’s 2000 10-K.)

 

3(k) — Certificate of Amendment of Certificate of Incorporation of Registrant,filed on September 6, 2001. (Incorporated herein by reference to Exhibit 3(k)to Registrant’s 2001 Annual Report on Form 10-K.)

 

3(l) — Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on June 7, 2002. (Incorporated herein by reference to Exhibit3(l) to Registrant’s 2002 Annual Report on Form 10-K [the “2002 10-K”].)

 

3(m) — Certificate of Amendment of Certificate of Incorporation ofRegistrant, filed on December 22, 2005. (Incorporated herein by reference toExhibit 3(m) to Registrant’s 2007 Annual Report on Form 10-K [the “2007 10-K”].)

 

3(n) - Registrant’s By-Laws adopted April 24, 2002. (Incorporatedherein by reference to Exhibit 3(m) to Registrant’s 2002 10-K.)

 

10(a) - Registrant’s 1997 Employee Stock Option Plan, as amended.(Incorporated herein by reference to Exhibit 10(c) to Registrant’s QuarterlyReport on Form 10-Q for the quarter ended April 30, 2010 [the “April 2010 10-Q”].)

 

10(b) - Form of Incentive Stock Option Agreement under Registrant’s1997 Employee Stock Option Plan. (Incorporated herein by reference to Exhibit10(t) to Registrant’s 1997 Annual Report on Form 10-K.)

 

10(c) - Registrant’s 1998 Directors’ Stock Option Plan, as amended.(Incorporated herein by reference to Exhibit 10(b) to Registrant’s  April 2010 10-Q.)

 

10(d) - Form of Quarterly Stock Option Agreement under the Registrant’s1998 Directors’ Stock Option Plan. (Incorporated herein by reference to Exhibit10(hh) to Registrant’s 2000 10-K.)

 

10(e) - Form of Annual Stock Option Agreement under the Registrant’s1998 Directors’ Stock Option Plan. (Incorporated herein by reference to Exhibit10(ii) to Registrant’s 2000 10-K.)

 

10(f) — 2006 Equity IncentivePlan, as amended (Incorporated herein by reference to Annex C toRegistrant’s 2009 Definitive Proxy Statement on Schedule 14A.)

 

10(g) - Form of Stock Option Agreement for option grants to directors,as amended, under Registrant’s 2006 Equity Incentive Plan.

 

10(h) — Form of Stock Option Agreement for option grants to executiveofficers, as amended, under Registrant’s 2006 Equity Incentive Plan.

 

10(i) - Form of Restricted Stock Agreement, as amended, under theRegistrant’s 2006 Equity Incentive Plan.

 

10(j) - Amended and RestatedCredit Agreement dated as of August 1, 2005 among Registrant, Bank of AmericaN.A., PNC Bank, National Association, and Wells Fargo Bank, NationalAssociation (and Banc of America Securities LLC, as sole lead arranger and solebook manager). (Incorporated herein by reference to Exhibit 10.1 to Registrant’sCurrent Report on Form 8-K filed on August 5, 2005.)

 

10(k) - First Amendment to Credit Agreement dated April 19, 2006 amongRegistrant, Bank of America N.A., PNC Bank, National Association, and WellsFargo Bank, National Association (and Banc of America Securities LLC, as solelead arranger and sole book manager). (Incorporated herein by reference toExhibit 10(m) to Registrant’s 2007 10-K.)

 

10(l) - Second Amendment to Credit Agreement dated November 17, 2006among Registrant, Bank of America N.A., PNC Bank, National Association, andWells Fargo Bank, National Association (and Banc of America Securities LLC, assole lead arranger and sole book manager). (Incorporated herein by reference to Exhibit 10(b) to Registrant’s April30, 2007 Quarterly Report on Form 10-Q [the“April 2007 10-Q”].)

 

10(m) - Third Amendment to Credit Agreement dated March 29, 2007 amongRegistrant, Bank of America N.A., PNC Bank, National Association, and WellsFargo Bank, National Association (and Banc of America Securities LLC, as 

 

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sole lead arranger and sole book manager).  (Incorporated herein by reference to Exhibit10(c) to the Registrant’s April 200710-Q.)

 

10(n) - Fourth Amendment to Credit Agreement dated May 17, 2007 amongRegistrant, Bank of America N.A., PNC Bank, National Association, and WellsFargo Bank, National Association (and Banc of America Securities LLC, as solelead arranger and sole book manager). (Incorporated herein by reference to Exhibit 10(d) to the Registrant’s April 2007 10-Q.)

 

10(o) - Fifth Amendment to Credit Agreement and Consent dated December17, 2009 among Registrant, Bank of America N.A., PNC Bank, NationalAssociation, and Wells Fargo Bank, National Association (and Banc of AmericaSecurities LLC, as sole lead arranger and sole book manager.) (Incorporatedherein by reference to Exhibit 10(a) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended January 31, 2010.)

 

10(p) - Sixth Amendment to Credit Agreement and Consent dated May 28,2010 among Registrant, Bank of America N.A., PNC Bank, National Association,and Wells Fargo Bank, National Association (and Banc of America Securities LLC,as sole lead arranger and sole book manager). (Incorporated herein by referenceto Exhibit 10(a) to the Registrant’s April 2010 10-Q.)

 

10(q) - Product Supply Agreementdated as of March 30, 2007 between GE Osmonics, Inc. and Mar Cor Purification,Inc. (Incorporated herein by reference to Exhibit 10.1 to Registrant’s CurrentReport on Form 8-K dated April 4,2007.)

 

10(r) - Executive Severance Agreement dated as of February 12, 2010between Registrant and Andrew A. Krakauer (Incorporated herein by reference toExhibit 10.1 of the Registrant’s Current Report on Form 8-K filed February 12,2010 [the “February 2010 8-K”].)

 

10(s) - Executive Severance Agreement dated as of February 12, 2010between Registrant and Seth R. Segel (Incorporated herein by reference toExhibit 10.2 of the Registrant’s February 2010 8-K.)

 

10(t) - Executive Severance Agreement dated as of February 12, 2010between Registrant and Craig A. Sheldon (Incorporated herein by reference toExhibit 10.3 of the Registrant’s February 2010 8-K.)

 

10(u) - Executive Severance Agreement dated as of February 12, 2010between Registrant and Eric W. Nodiff (Incorporated herein by reference toExhibit 10.4 of the Registrant’s February 2010 8-K.)

 

10(v) - Executive Severance Agreement dated as of February 12, 2010between Registrant and Roy K. Malkin (Incorporated herein by reference toExhibit 10.5 of the Registrant’s February 2010 8-K.)

 

10(w) - Confidentiality and Non-Competition Agreement dated as ofFebruary 12, 2010 between Registrant and Andrew A. Krakauer (Incorporatedherein by reference to Exhibit 10.6 of the Registrant’s February 2010 8-K.)

 

10(x) - Confidentiality and Non-Competition Agreement dated as ofFebruary 12, 2010 between Registrant and Seth R. Segel (Incorporated herein byreference to Exhibit 10.7 of the Registrant’s February 2010 8-K.)

 

10(y) - Confidentiality and Non-Competition Agreement dated as ofFebruary 12, 2010 between Registrant and Craig A. Sheldon (Incorporated hereinby reference to Exhibit 10.8 of the Registrant’s February 2010 8-K.)

 

10(z) - Confidentiality and Non-Competition Agreement dated as ofFebruary 12, 2010 between Registrant and Eric W. Nodiff (Incorporated herein byreference to Exhibit 10.9 of the Registrant’s February 2010 8-K.)

 

10(aa) - Confidentiality and Non-Competition Agreement dated as ofFebruary 12, 2010 between Registrant and Roy K. Malkin (Incorporated herein byreference to Exhibit 10.10 of the Registrant’s February 2010 8-K.)

 

10(bb) — Cantel Medical Corp. Annual Incentive Compensation Plan(Incorporated herein by reference to Exhibit 10.1 of the Registrant’s CurrentReport on Form 8-K filed December 23, 2009 [the “December 2009 8-K”].)

 

10(cc) — Cantel Medical Corp. Long Term Incentive Compensation Plan(Incorporated herein by reference to Exhibit 10.2 of the Registrant’s December2009 8-K.)

 

21 - Subsidiaries of Registrant.

 

56

----

 

23 - Consent of Ernst & Young LLP.

 

31.1 - Certification of Principal Executive Officer.

 

31.2 - Certification of Principal Financial Officer.

 

32 - Certification of Chief Executive Officer and Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

57

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                    |   | CANTEL  MEDICAL CORP. |
|-------------------------|--------|-----------------------|
|                    |   |                  |   |   |
| Date:  October 14, 2010 |   |                  | By: | /s/  Andrew A. Krakauer |
|                    |   |                  | Andrew  A. Krakauer, President and Chief |
|                    |   |                  | Executive  Officer (Principal Executive Officer) |
|                    |   |                  |   |   |
|                    |   |                  | By: | /s/  Craig A. Sheldon |
|                    |   |                  | Craig  A. Sheldon, Senior Vice President, |
|                    |   |                  | Chief  Financial Officer and Treasurer |
|                    |   |                  | (Principal  Financial and Accounting Officer) |
|                    |   |                  |   |   |
|                    |   |                  | By: | /s/  Steven C. Anaya |
|                    |   |                  | Steven  C. Anaya, Vice President and |
|                    |   |                  | Controller |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated:

 
| /s/  Charles M. Diker                                   |   | Date:  |   | October  14, 2010 |
|---------------------------------------------------------|--------|--------|--------|-------------------|
| Charles  M. Diker, a Director and Chairman of the Board |   |   |   |              |
|                                                    |   |   |   |              |
| /s/  George L. Fotiades                                 |   | Date:  |   | October  14, 2010 |
| George  L. Fotiades, a Director                         |   |   |   |              |
| and  Vice Chairman of the Board                         |   |   |   |              |
|                                                    |   |   |   |              |
| /s/  Robert L. Barbanell                                |   | Date:  |   | October  14, 2010 |
| Robert  L. Barbanell, a Director                        |   |   |   |              |
|                                                    |   |   |   |              |
| /s/  Alan R. Batkin                                     |   | Date:  |   | October  14, 2010 |
| Alan  R. Batkin, a Director                             |   |   |   |              |
|                                                    |   |   |   |              |
| /s/  Joseph M. Cohen                                    |   | Date:  |   | October  14, 2010 |
| Joseph  M. Cohen, a Director                            |   |   |   |              |
|                                                    |   |   |   |              |
| /s/  Mark N. Diker                                      |   | Date:  |   | October  14, 2010 |
| Mark  N. Diker, a Director                              |   |   |   |              |
|                                                    |   |   |   |              |
| /s/  Alan J. Hirschfield                                |   | Date:  |   | October  14, 2010 |
| Alan  J. Hirschfield, a Director                        |   |   |   |              |
|                                                    |   |   |   |              |
| /s/  Andrew A. Krakauer                                 |   | Date:  |   | October  14, 2010 |
| Andrew  A. Krakauer, a Director and President & CEO |   |   |   |              |
|                                                    |   |   |   |              |
| /s/  Bruce Slovin                                       |   | Date:  |   | October  14, 2010 |
| Bruce  Slovin, a Director                               |   |   |   |              |

 

58

----

 

 

**CANTEL MEDICAL CORP.**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**JULY 31, 2010**

 

----

 

**CONTENTS**

 
| Report  of Independent Registered Public Accounting Firm                                  |   | 1      |
|-------------------------------------------------------------------------------------------|--------|--------|
|                                                                                      |   |   |
| Financial Statements                                                                      |   |   |
|                                                                                      |   |   |
| Consolidated Balance Sheets                                                               |   | 2      |
| Consolidated Statements of Income                                                         |   | 3      |
| Consolidated Statements of Changes in Stockholders’  Equity and Comprehensive Income |   | 4      |
| Consolidated Statements of Cash Flows                                                     |   | 5      |
| Notes to Consolidated Financial Statements                                                |   | 6      |

 

----

 

**Report of Independent Registered Public Accounting Firm**

 

The Board of Directors andStockholders

Cantel Medical Corp.

 

We have audited theaccompanying consolidated balance sheets of Cantel Medical Corp. andsubsidiaries****as of July 31,2010 and 2009, and the related consolidated statements of income, shareholders’equity, and cash flows for each of the three years in the period ended July 31,2010.  Our audits also included the financial statement schedule includedin the Index at Item 15(a).  Thesefinancial statements and schedule are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Cantel Medical Corp. andsubsidiaries at July 31, 2010 and 2009, and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended July 31, 2010, in conformity with U.S. generally accepted accountingprinciples.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), Cantel Medical Corp.’s internal control over financialreporting as of July 31, 2010, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated October 14, 2010****expressed an unqualified opinion thereon.

 
|   | /s/ Ernst & Young  LLP |
|--------|---------------------------------|

 

MetroPark, New Jersey

October 14, 2010

 

1

----

 

 

**CANTELMEDICAL CORP.**

**CONSOLIDATEDBALANCE SHEETS**

**(DollarAmounts in Thousands, Except Share Data)**

 
| ** **                                                                                                                                                                                                           | ** ** | **July 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                           | ** ** | **2010**          | ** ** | **2009** | ** ** |
|                                                                                                                                                                                                                 |       |              |       |   |   |
| **Assets**                                                                                                                                                                                                           |       |              |       |   |   |
| Current assets:                                                                                                                                                                                                      |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                            |       | $                 | 22,612     |   | $ | 23,368 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $870 in 2010 and $1,080 in 2009                                                                                                                      |       | 31,870            |       | 30,450 |   |
| Inventories                                                                                                                                                                                                          |       | 34,622            |       | 29,200 |   |
| Deferred income taxes                                                                                                                                                                                                |       | 2,420             |       | 1,898 |   |
| Prepaid expenses and other current assets                                                                                                                                                                            |       | 3,207             |       | 3,994 |   |
| Total current assets                                                                                                                                                                                                 |       | 94,731            |       | 88,910 |   |
|                                                                                                                                                                                                                 |       |              |       |   |   |
| Property and equipment, at cost:                                                                                                                                                                                     |       |              |       |   |   |
| Land, buildings and improvements                                                                                                                                                                                     |       | 19,913            |       | 19,846 |   |
| Furniture and equipment                                                                                                                                                                                              |       | 47,639            |       | 43,100 |   |
| Leasehold improvements                                                                                                                                                                                               |       | 2,113             |       | 1,690 |   |
|                                                                                                                                                                                                                 |       | 69,665            |       | 64,636 |   |
| Less accumulated depreciation and amortization                                                                                                                                                                       |       | (34,422           | )          | (28,668 | ) |
|                                                                                                                                                                                                                 |       | 35,243            |       | 35,968 |   |
| Intangible assets, net                                                                                                                                                                                               |       | 32,717            |       | 37,042 |   |
| Goodwill                                                                                                                                                                                                             |       | 116,783           |       | 114,995 |   |
| Other assets                                                                                                                                                                                                         |       | 1,191             |       | 956 |   |
|                                                                                                                                                                                                                 |       | $                 | 280,665    |   | $ | 277,871 |   |
|                                                                                                                                                                                                                 |       |              |       |   |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                                       |       |              |       |   |   |
| Current liabilities:                                                                                                                                                                                                 |       |              |       |   |   |
| Current portion of long-term debt                                                                                                                                                                                    |       | $                 | 10,000     |   | $ | 10,000 |   |
| Accounts payable                                                                                                                                                                                                     |       | 9,640             |       | 8,948 |   |
| Compensation payable                                                                                                                                                                                                 |       | 10,675            |       | 10,431 |   |
| Earnout payable                                                                                                                                                                                                      |       | —            |       | 157 |   |
| Accrued expenses                                                                                                                                                                                                     |       | 6,370             |       | 6,583 |   |
| Deferred revenue                                                                                                                                                                                                     |       | 4,233             |       | 2,819 |   |
| Income taxes payable                                                                                                                                                                                                 |       | 66                |       | 175 |   |
| Total current liabilities                                                                                                                                                                                            |       | 40,984            |       | 39,113 |   |
|                                                                                                                                                                                                                 |       |              |       |   |   |
| Long-term debt                                                                                                                                                                                                       |       | 11,000            |       | 33,300 |   |
| Deferred income taxes                                                                                                                                                                                                |       | 17,868            |       | 16,378 |   |
| Other long-term liabilities                                                                                                                                                                                          |       | 1,408             |       | 1,964 |   |
|                                                                                                                                                                                                                 |       |              |       |   |   |
| Commitments and contingencies                                                                                                                                                                                        |       | —            |       | — |   |
|                                                                                                                                                                                                                 |       |              |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                           |       |              |       |   |   |
| Preferred Stock, par value $1.00 per share;  authorized 1,000,000 shares; none issued                                                                                                                                |       | —            |       | — |   |
| Common Stock, par value $.10 per share; authorized  30,000,000 shares; issued 2010 - 18,272,574 shares, outstanding 2010 -  16,866,284 shares; issued 2009- 17,883,873 shares, outstanding 2009 -  16,643,727 shares |       | 1,827             |       | 1,788 |   |
| Additional paid-in capital                                                                                                                                                                                           |       | 94,714            |       | 87,169 |   |
| Retained earnings                                                                                                                                                                                                    |       | 120,363           |       | 102,103 |   |
| Accumulated other comprehensive income                                                                                                                                                                               |       | 8,045             |       | 8,281 |   |
| Treasury Stock, 2010 - 1,406,290 shares at cost; 2009-1,240,146  shares at cost                                                                                                                                      |       | (15,544           | )          | (12,225 | ) |
| Total stockholders’ equity                                                                                                                                                                                      |       | 209,405           |       | 187,116 |   |
|                                                                                                                                                                                                                 |       | $                 | 280,665    |   | $ | 277,871 |   |

 

See accompanying notes.

 

2

----

 

**CANTEL MEDICAL CORP.**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Dollar Amounts in Thousands, Except Per Share Data)**

 
| ** **                              | ** ** | **Year Ended July 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                    |       |                                   |       |   |   |   |   |
| Net sales                               |       | $                                      | 273,952    |   | $ | 260,050 |   | $ | 249,374 |   |
|                                    |       |                                   |       |   |   |   |   |
| Cost of sales                           |       | 162,981                                |       | 160,571 |   | 161,748 |   |
|                                    |       |                                   |       |   |   |   |   |
| Gross profit                            |       | 110,971                                |       | 99,479 |   | 87,626 |   |
|                                    |       |                                   |       |   |   |   |   |
| Expenses:                               |       |                                   |       |   |   |   |   |
| Selling                                 |       | 36,092                                 |       | 30,398 |   | 28,636 |   |
| General and administrative              |       | 37,045                                 |       | 36,998 |   | 37,013 |   |
| Research and development                |       | 5,169                                  |       | 4,632 |   | 4,010 |   |
| Total operating expenses                |       | 78,306                                 |       | 72,028 |   | 69,659 |   |
|                                    |       |                                   |       |   |   |   |   |
| Income before interest and income taxes |       | 32,665                                 |       | 27,451 |   | 17,967 |   |
|                                    |       |                                   |       |   |   |   |   |
| Interest expense                        |       | 1,169                                  |       | 2,639 |   | 4,631 |   |
| Interest income                         |       | (59                                    | )          | (144 | ) | (515 | ) |
|                                    |       |                                   |       |   |   |   |   |
| Income before income taxes              |       | 31,555                                 |       | 24,956 |   | 13,851 |   |
|                                    |       |                                   |       |   |   |   |   |
| Income taxes                            |       | 11,614                                 |       | 9,387 |   | 5,158 |   |
|                                    |       |                                   |       |   |   |   |   |
| Net income                              |       | $                                      | 19,941     |   | $ | 15,569 |   | $ | 8,693 |   |
|                                    |       |                                   |       |   |   |   |   |
| Earnings per common share:              |       |                                   |       |   |   |   |   |
|                                    |       |                                   |       |   |   |   |   |
| Basic                                   |       | $                                      | 1.19       |   | $ | 0.94 |   | $ | 0.53 |   |
|                                    |       |                                   |       |   |   |   |   |
| Diluted                                 |       | $                                      | 1.18       |   | $ | 0.94 |   | $ | 0.53 |   |
|                                    |       |                                   |       |   |   |   |   |
| Dividends per common share:             |       | $                                      | 0.10       |   | $ | — |   | $ | — |   |

 

See accompanying notes.

 

3

----

 

**CANTEL MEDICAL CORP.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME**

**(Dollar amounts in Thousands, Except Share Data)**

**Years Ended July 31, 2010, 2009 and 2008**

 
| ** **                                                                              | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                              | ** ** | **Number of**    | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | **Treasury**     | ** ** | **Total**              | ** ** | **Total** | ** ** |
| ** **                                                                              | ** ** | **Shares**            | ** ** | ** ** | ** ** | **Paid-in**    | ** ** | **Retained**    | ** ** | **Comprehensive** | ** ** | **Stock,**       | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                              | ** ** | **Outstanding**       | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **Earnings**    | ** ** | **Income**        | ** ** | **at Cost** | ** ** | **Equity**             | ** ** | **Income** | ** ** |
| ** **                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance,  July 31, 2007                                                            |       | 16,116,487            |       | $          | 1,713      |           | $          | 76,843          |       | $                 | 77,841     |             | $          | 8,494                  |       | $ | (9,821 | ) | $ | 155,070 |   |   |   |
| Exercises  of options                                                                   |       | 245,978               |       | 29         |       | 1,786          |       |            |       |              |       | (664             | )          | 1,151                  |       |   |   |
| Repurchases  of shares                                                                  |       | (90,700               | )          |       |       |           |       |            |       |              |       | (855             | )          | (855                   | )          |   |   |
| Stock-based  compensation                                                               |       |                  |       |       |       | 1,961          |       |            |       |              |       |             |       | 1,961                  |       |   |   |
| Issuance  of restricted stock                                                           |       | 130,500               |       | 13         |       | (13            | )          |            |       |              |       |             |       | —                 |       |   |   |
| Cancellation  of restricted stock                                                       |       | (31,421               | )          | (3         | )          | 3              |       |            |       |              |       |             |       | —                 |       |   |   |
| Income  tax benefit from exercises of stock options and vesting of restricted stock     |       |                  |       |       |       | 895            |       |            |       |              |       |             |       | 895                    |       |   |   |
| Translation  adjustment, net of $363 in tax                                             |       |                  |       |       |       |           |       |            |       | 1,797             |       |             |       | 1,797                  |       | $ | 1,797 |   |
| Net  income                                                                             |       |                  |       |       |       |           |       | 8,693           |       |              |       |             |       | 8,693                  |       | 8,693 |   |
| Total  comprehensive income for fiscal 2008                                             |       |                  |       |       |       |           |       |            |       |              |       |             |       |                   |       | $ | 10,490 |   |
| Balance,  July 31, 2008                                                            |       | 16,370,844            |       | 1,752      |       | 81,475         |       | 86,534          |       | 10,291            |       | (11,340          | )          | 168,712                |       |   |   |
|                                                                                    |       |                  |       |       |       |           |       |            |       |              |       |             |       |                   |       |   |   |
| Exercises  of options                                                                   |       | 215,730               |       | 26         |       | 1,772          |       |            |       |              |       | (483             | )          | 1,315                  |       |   |   |
| Repurchases  of shares                                                                  |       | (43,847               | )          |       |       |           |       |            |       |              |       | (402             | )          | (402                   | )          |   |   |
| Stock-based  compensation                                                               |       |                  |       |       |       | 3,187          |       |            |       |              |       |             |       | 3,187                  |       |   |   |
| Issuance  of restricted stock                                                           |       | 101,000               |       | 10         |       | (10            | )          |            |       |              |       |             |       | —                 |       |   |   |
| Income  tax benefit from exercises of stock options and vesting of restricted stock     |       |                  |       |       |       | 745            |       |            |       |              |       |             |       | 745                    |       |   |   |
| Translation  adjustment, net of $352 in tax                                             |       |                  |       |       |       |           |       |            |       | (2,010            | )          |             |       | (2,010                 | )          | $ | (2,010 | ) |
| Net  income                                                                             |       |                  |       |       |       |           |       | 15,569          |       |              |       |             |       | 15,569                 |       | 15,569 |   |
| Total  comprehensive income for fiscal 2009                                             |       |                  |       |       |       |           |       |            |       |              |       |             |       |                   |       | $ | 13,559 |   |
| Balance,  July 31, 2009                                                            |       | 16,643,727            |       | 1,788      |       | 87,169         |       | 102,103         |       | 8,281             |       | (12,225          | )          | 187,116                |       |   |   |
|                                                                                    |       |                  |       |       |       |           |       |            |       |              |       |             |       |                   |       |   |   |
| Exercises  of options                                                                   |       | 196,950               |       | 34         |       | 4,998          |       |            |       |              |       | (2,893           | )          | 2,139                  |       |   |   |
| Repurchases  of shares                                                                  |       | (22,218               | )          |       |       |           |       |            |       |              |       | (426             | )          | (426                   | )          |   |   |
| Stock-based  compensation                                                               |       |                  |       |       |       | 3,130          |       |            |       |              |       |             |       | 3,130                  |       |   |   |
| Issuance  of restricted stock                                                           |       | 47,825                |       | 5          |       | (5             | )          |            |       |              |       |             |       | —                 |       |   |   |
| Income  tax deficiency from exercises of stock options and vesting of restricted  stock |       |                  |       |       |       | (578           | )          |            |       |              |       |             |       | (578                   | )          |   |   |
| Dividends  on common stock                                                              |       |                  |       |       |       |           |       | (1,681          | )          | —            |       | —           |       | (1,681                 | )          |   |   |
| Translation  adjustment, net of $1,302 in tax                                           |       |                  |       |       |       |           |       |            |       | (236              | )          |             |       | (236                   | )          | $ | (236 | ) |
| Net  income                                                                             |       |                  |       |       |       |           |       | 19,941          |       |              |       |             |       | 19,941                 |       | 19,941 |   |
| Total  comprehensive income for fiscal 2010                                             |       |                  |       |       |       |           |       |            |       |              |       |             |       |                   |       | $ | 19,705 |   |
| Balance,  July 31, 2010                                                            |       | 16,866,284            |       | $          | 1,827      |           | $          | 94,714          |       | $                 | 120,363    |             | $          | 8,045                  |       | $ | (15,544 | ) | $ | 209,405 |   |   |   |

 

See accompanying notes.

 

4

----

 

**CANTEL MEDICAL CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollar Amounts in Thousands)**

 
| ** **                                                                         | ** ** | **Year Ended July 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                               |       |                                   |       |   |   |   |   |
| **Cash flows from operating  activities**                                          |       |                                   |       |   |   |   |   |
| Net income                                                                         |       | $                                      | 19,941     |   | $ | 15,569 |   | $ | 8,693 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                   |       |   |   |   |   |
| Depreciation                                                                       |       | 6,333                                  |       | 6,217 |   | 6,058 |   |
| Amortization                                                                       |       | 5,105                                  |       | 5,152 |   | 5,674 |   |
| Stock-based compensation expense                                                   |       | 3,130                                  |       | 3,187 |   | 1,961 |   |
| Amortization of debt issuance costs                                                |       | 470                                    |       | 549 |   | 377 |   |
| Loss on disposal of fixed assets                                                   |       | 238                                    |       | 52 |   | 126 |   |
| Deferred income taxes                                                              |       | (2,221                                 | )          | (1,955 | ) | (1,977 | ) |
| Excess tax benefits from stock-based compensation                                  |       | (424                                   | )          | (267 | ) | (434 | ) |
| Changes in assets and liabilities:                                                 |       |                                   |       |   |   |   |   |
| Accounts receivable                                                                |       | (1,065                                 | )          | (185 | ) | 1,189 |   |
| Inventories                                                                        |       | (5,189                                 | )          | 2,298 |   | (3,343 | ) |
| Prepaid expenses and other current assets                                          |       | 436                                    |       | (1,405 | ) | (1,052 | ) |
| Accounts payable, deferred revenue and accrued  expenses                           |       | 1,272                                  |       | 953 |   | (471 | ) |
| Income taxes payable                                                               |       | 1,007                                  |       | 827 |   | 1,756 |   |
| Net cash provided by operating activities                                          |       | 29,033                                 |       | 30,992 |   | 18,557 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| **Cash flows from investing  activities**                                          |       |                                   |       |   |   |   |   |
| Capital expenditures                                                               |       | (5,605                                 | )          | (4,215 | ) | (4,983 | ) |
| Proceeds from disposal of fixed assets                                             |       | 5                                      |       | 1,669 |   | 23 |   |
| Earnout paid to Crosstex sellers                                                   |       | —                                 |       | (3,666 | ) | (3,667 | ) |
| Acquisition of Twist                                                               |       | (157                                   | )          | (629 | ) | (15 | ) |
| Acquisition of DSI                                                                 |       | —                                 |       | — |   | (1,250 | ) |
| Acquisition of Strong Dental, net of cash acquired                                 |       | —                                 |       | — |   | (3,711 | ) |
| Acquisition of Verimetrix                                                          |       | —                                 |       | — |   | (4,906 | ) |
| Acquisition of G.E.M.                                                              |       | —                                 |       | (4,414 | ) | — |   |
| Acquisition of Purity Water, net of cash acquired                                  |       | (1,970                                 | )          | — |   | — |   |
| Purchase of convertible note receivable                                            |       | (300                                   | )          | (200 | ) | — |   |
| Other, net                                                                         |       | (213                                   | )          | 5 |   | 43 |   |
| Net cash used in investing activities                                              |       | (8,240                                 | )          | (11,450 | ) | (18,466 | ) |
|                                                                               |       |                                   |       |   |   |   |   |
| **Cash flows from financing  activities**                                          |       |                                   |       |   |   |   |   |
| Borrowings under revolving credit facilities, net  of debt issuance costs          |       | —                                 |       | 3,500 |   | 15,050 |   |
| Repayments under term loan facility                                                |       | (10,000                                | )          | (8,000 | ) | (6,000 | ) |
| Repayments under revolving credit facility                                         |       | (12,300                                | )          | (10,500 | ) | (7,750 | ) |
| Proceeds from exercises of stock options                                           |       | 2,139                                  |       | 1,315 |   | 1,151 |   |
| Dividends paid                                                                     |       | (1,683                                 | )          | — |   | — |   |
| Excess tax benefits from stock-based compensation                                  |       | 424                                    |       | 267 |   | 434 |   |
| Purchase of interest rate cap                                                      |       | —                                 |       | — |   | (148 | ) |
| Purchases of treasury stock                                                        |       | (426                                   | )          | (402 | ) | (855 | ) |
| Net cash (used in) provided by financing  activities                               |       | (21,846                                | )          | (13,820 | ) | 1,882 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                      |       | 297                                    |       | (672 | ) | 485 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| (Decrease) increase in cash and cash equivalents                                   |       | (756                                   | )          | 5,050 |   | 2,458 |   |
| Cash and cash equivalents at beginning of year                                     |       | 23,368                                 |       | 18,318 |   | 15,860 |   |
| Cash and cash equivalents at end of year                                           |       | $                                      | 22,612     |   | $ | 23,368 |   | $ | 18,318 |   |

 

See accompanying notes.

 

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**CANTEL MEDICAL CORP.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**Years Ended July 31, 2010, 2009 and 2008**

 

**1.             Business Description**

 

Cantel Medical Corp. (“Cantel”)is a leading provider of infection prevention and control products and servicesin the healthcare market, specializing in the following operating segments:

 

·                  WaterPurification and Filtration: Water purificationequipment and services, filtration and separation products, and disinfectantsfor the medical, pharmaceutical, biotech, beverage and commercial industrialmarkets.

 

·                  HealthcareDisposables: Single-use, infection prevention and controlproducts used principally in the dental market including face masks,sterilization pouches, towels and bibs, tray covers, saliva ejectors,germicidal wipes, plastic cups and disinfectants.

 

·                  EndoscopeReprocessing: Medical device reprocessing systems,disinfectants, enzymatic detergents and other supplies used to high-leveldisinfect flexible endoscopes.

 

·                  Dialysis: Medicaldevice reprocessing systems, sterilants/disinfectants, dialysate concentratesand other supplies for renal dialysis.

 

·                  TherapeuticFiltration: Hollow fiber membrane filtration and separationtechnologies for medical applications. (Included in All Other reportingsegment.)

 

·                  Specialty Packaging: Specialtypackaging and thermal control products, as well as related compliance training,for the transport of infectious and biological specimens and thermallysensitive pharmaceutical, medical and other products. (Included in All Otherreporting segment.)

 

·                  Chemistries:  Sterilants, disinfectants, detergents anddecontamination services used in various applications for infection preventionand control. (Included in All Other reporting segment.)

 

Most of our equipment,consumables and supplies are used to help prevent or control the occurrence orspread of infections.

 

Cantel had five principaloperating companies during fiscals 2010, 2009 and 2008, Minntech Corporation (“Minntech”),Crosstex International, Inc. (“Crosstex”), Mar Cor Purification, Inc.(“Mar Cor”), Biolab Equipment Ltd. (“Biolab”) and Saf-T-Pak Inc. (“Saf-T-Pak”),all of which are wholly-owned operating subsidiaries. In addition, Minntech hasthree foreign subsidiaries, Minntech B.V., Minntech Asia/Pacific Ltd. andMinntech Japan K.K., which serve as Minntech’s bases in Europe, Asia/Pacificand Japan, respectively.

 

During fiscal 2010, wechanged our internal reporting processes to include a new operating segmentcalled Chemistries to reflect the way the Company, through its executivemanagement, manages, allocates resources and measures the performance of itsbusinesses. This new operating segment is the combination of a small portion ofour existing sterilant business, comprised of products sold on an OEM basis andpreviously recorded in our Water Purification and Filtration segment, and a newbusiness operation that was created to capitalize on our chemistry expertiseand expand our product offerings in existing and new markets within theinfection prevention and control arena. All periods presented have beenrestated to reflect this change.

 

As such, we currentlyoperate our business through seven operating segments: Water Purification andFiltration (through Mar Cor, Biolab and Minntech), Healthcare Disposables(through Crosstex), Endoscope Reprocessing (through Minntech), Dialysis(through Minntech), Therapeutic Filtration (through Minntech), SpecialtyPackaging (through Saf-T-Pak) and Chemistries (through Minntech). TheTherapeutic Filtration, Specialty Packaging and Chemistries operating segmentsare combined in the All Other reporting segment for financial reportingpurposes.

 

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We acquired certain netassets of Dialysis Services, Inc. (“DSI”) on August 1, 2007 andVerimetrix, LLC (“Verimetrix”) on September 17, 2007, and all of theissued and outstanding stock of Strong Dental Products, Inc. (“StrongDental”) on September 26, 2007, as more fully described in Note 3 to theConsolidated Financial Statements. The acquisitions of DSI, Verimetrix andStrong Dental had an overall insignificant affect on our results of operationsin fiscals 2010 and 2009 and the portion of fiscal 2008 subsequent to theirrespective acquisition dates due to the small size of these businesses. Their resultsof operations are included in our results of operations for fiscals 2010 and2009 and the portion of fiscal 2008 subsequent to their respective acquisitiondates. DSI, Verimetrix and Strong Dental are included in the Water Purificationand Filtration, Endoscope Reprocessing and Healthcare Disposables segments,respectively.

 

On July 31, 2009, weacquired certain net assets of G.E.M.Water Systems Int’l, LLC (“G.E.M.”), as more fully described in Note 3 to theConsolidated Financial Statements. Its results of operations are includedin our results of operations for fiscal 2010, but are not reflected in ourresults of operations for fiscals 2009 and 2008. Its net assets are included inour Consolidated Balance Sheets at July 31, 2010 and 2009. G.E.M. is included in our Water Purificationand Filtration segment.

 

On June 1, 2010, weacquired all of the issued and outstanding stock of Purity Water Company of San Antonio, Inc. (“Purity”),as more fully described in Note 3 to the Consolidated Financial Statements. Itsresults of operations are included in our results of operations in fiscal 2010subsequent to its acquisition date and are excluded for all priorperiods.

 

InJune 2008, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Codification (“ASC”) 260-10-45, “*Earnings Per Share — Other Presentation Matters,”*(“ASC 260-10-45”). ASC 260-10-45provides that unvested share-based payment awards that contain nonforfeitablerights to dividends or dividend equivalents (whether paid or unpaid) areparticipating securities and shall be included in the computation of earningsper share (“EPS”) pursuant to the two-class method. ASC 260-10-45 iseffective for fiscal years beginning after December 15, 2008 and thereforewas adopted on August 1, 2009 as further described in Note 2 to theConsolidated Financial Statements. All prior period EPS data have been adjustedretrospectively to conform to the provisions of ASC 260-10-45. In fiscals2009 and 2008, such retrospective application caused an insignificant increasein the denominator of our weighted average shares calculation, which decreasedpreviously reported basic EPS in fiscals 2009 and 2008 from $0.96 to $0.94 and$0.54 to $0.53, respectively, but had no impact on previously reported dilutedEPS.

 

Throughoutthis document, references to “Cantel,” “us,” “we,” “our,” and the “Company” arereferences to Cantel Medical Corp. and its subsidiaries, except where thecontext makes it clear the reference is to Cantel itself and not itssubsidiaries.

 

***Subsequent Events***

 

On October 6, 2010, ourMar Cor subsidiary acquired from Gambro Renal Products, Inc. (“GRP”) and aSwedish-based affiliate of GRP (collectively, “Gambro”) certain net assets andthe exclusive rights in the United States to manufacture and sell Gambro’swater treatment products used in the production of water for hemodialysis (“GambroWater” or the “Gambro Acquisition”), as more fully described in Note 3 to theConsolidated Financial Statements. Since the acquisition occurred subsequent toJuly 31, 2010, the Gambro Acquisition is not included in our results ofoperations for any of the periods presented.

 

We performed a review ofevents subsequent to July 31, 2010. Based upon that review, no additionalsubsequent events occurred that required updating to our Consolidated FinancialStatements or disclosures.

 

**2.             Summary of Significant AccountingPolicies**

 

The following is a summaryof our significant accounting policies used to prepare our ConsolidatedFinancial Statements.

 

***Principles of Consolidation***

 

The Consolidated FinancialStatements include the accounts of Cantel and its wholly-owned subsidiaries.All intercompany transactions and balances have been eliminated inconsolidation.

 

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***Revenue Recognition***

 

Revenue on product sales isrecognized as products are shipped to customers and title passes. The passingof title is determined based upon the FOB terms specified for each shipment.With respect to dialysis, therapeutic, specialty packaging, chemistries andendoscope reprocessing products, shipment terms are generally FOB origin forcommon carrier and FOB destination when our distribution fleet is utilized(except for one large customer in dialysis whereby all products are shipped FOBdestination). With respect to water purification and filtration and healthcaredisposable products, shipment terms may be either FOB origin or destination.Customer acceptance for the majority of our product sales occurs at the time ofdelivery. In certain instances, primarily with respect to some of our waterpurification and filtration equipment, endoscope reprocessing equipment and aninsignificant amount of our sales of dialysis equipment, post-deliveryobligations such as installation, in-servicing or training are contractuallyspecified; in such instances, revenue recognition is deferred until all of suchconditions have been substantially fulfilled such that the products are deemedfunctional by the end-user. With respect to a portion of water purification andfiltration product sales, equipment is sold as part of a system for which theequipment is functionally interdependent or the customer’s purchase orderspecifies “ship-complete” as a condition of delivery; revenue recognition onsuch sales is deferred until all equipment has been delivered.

 

A portion of our waterpurification and filtration and endoscope reprocessing sales are recognized asmultiple element arrangements, whereby revenue is allocated to the equipment,installation and service components based upon vendor specific objectiveevidence, which includes comparable historical transactions of similarequipment and installation sold as stand alone components.

 

Revenue on service sales isrecognized when repairs are completed at the customer’s location or whenrepairs are completed at our facilities and the products are shipped tocustomers. With respect to certain service contracts in our EndoscopeReprocessing and Water Purification and Filtration operating segments, servicerevenue is recognized on a straight-line basis over the contractual term of thearrangement. All shipping and handling fees invoiced to customers, such asfreight, are recorded as revenue (and related costs are included within cost ofsales) at the time the sale is recognized.

 

None of our sales containright-of-return provisions. Customer claims for credit or return due to damage,defect, shortage or other reason must be pre-approved by us before credit isissued or such product is accepted for return. No cash discounts for earlypayment are offered except with respect to a small portion of our sales ofdialysis, healthcare disposable and water purification and filtration productsand certain prepaid packaging products. We do not offer price protection,although advance pricing contracts or required notice periods prior toimplementation of price increases exist for certain customers with respect tomany of our products. With respect to certain of our dialysis, dental, waterpurification and filtration and endoscope reprocessing customers, volumerebates are provided; such volume rebates are provided for as a reduction ofsales at the time of revenue recognition and amounted to $2,909,000, $2,461,000and $1,757,000 in fiscals 2010, 2009 and 2008, respectively. The increase in volumerebates in fiscal 2010 compared with fiscal 2009 is primarily due to increasedsales volume primarily in our Healthcare Disposables and Endoscope Reprocessingsegments. The increase in volume rebates in fiscal 2009 compared with fiscal2008 is primarily due to new terms in a renewed rebate arrangement with a majordental distributor in our Healthcare Disposables segment. Such allowances aredetermined based on estimated projections of sales volume for the entire rebateperiods. If it becomes known that sales volume to customers will deviate fromoriginal projections, the volume rebate provisions originally established wouldbe adjusted accordingly.

 

The majority of our dialysisproducts are sold to end-users; the majority of therapeutic filtration productsand healthcare disposable products are sold to third party distributors; waterpurification and filtration products and services are sold directly and throughthird-party distributors to hospitals, dialysis clinics, pharmaceutical andbiotechnology companies and other end-users; our endoscope reprocessingproducts and services are sold primarily to distributors internationally anddirectly to hospitals and other end-users in the United States; specialtypackaging products are sold to third-party distributors, medical researchcompanies, laboratories, pharmaceutical companies, hospitals, governmentagencies and other end-users; and chemistries products and services are sold tomedical products and service companies, laboratories, pharmaceutical companies,hospitals and other end-users. Sales to all of these customers follow ourrevenue recognition policies.

 

***Translation of Foreign Currency Financial Statements***

 

Assets and liabilities ofour foreign subsidiaries are translated into United States dollars at year-endexchange rates; sales 

 

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and expenses are translatedusing average exchange rates during the year. The cumulative effect of thetranslation of the accounts of the foreign subsidiaries is presented as acomponent of accumulated other comprehensive income or loss. Foreign exchangegains and losses related to the purchase of inventories denominated in foreigncurrencies are included in cost of sales and foreign exchange gains and lossesrelated to the incurrence of operating costs denominated in foreign currenciesare included in general and administrative expenses. Additionally, foreignexchange gains and losses related to the conversion of foreign assets andliabilities into functional currencies are included in general andadministrative expenses.

 

***Cash and Cash Equivalents***

 

We consider all highlyliquid investments with maturities of three months or less when purchased to becash equivalents.

 

***Accounts Receivable and Allowance for Doubtful Accounts***

 

Accounts receivable consistof amounts due to us from normal business activities. Allowances for doubtfulaccounts are reserves for the estimated loss from the inability of customers tomake required payments. We use historical experience as well as current marketinformation in determining the estimate. While actual losses have historicallybeen within management’s expectations and provisions established, if thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. Alternatively, if certain customers paid their delinquentreceivables, reductions in allowances may be required.

 

***Inventories***

 

Inventories consist of rawmaterials, work-in-process and finished products which are sold in the ordinarycourse of our business and are stated at the lower of cost (first-in,first-out) or market. In assessing the value of inventories, we must makeestimates and judgments regarding reserves required for product obsolescence,aging of inventories and other issues potentially affecting the saleablecondition of products. In performing such evaluations, we use historicalexperience as well as current market information. With few exceptions, thesaleable value of our inventories has historically been within management’sexpectation and provisions established, however, rapid changes in the marketdue to competition, technology and various other factors could have an adverseeffect on the saleable value of our inventories, resulting in the need foradditional reserves.

 

***Property and Equipment***

 

Property and equipment arestated at cost. Additions and improvements are capitalized, while maintenanceand repair costs are expensed. When assets are retired or otherwise disposed, thecost and related accumulated depreciation or amortization is removed from therespective accounts and any resulting gain or loss is included in income.Depreciation and amortization is provided on the straight-line method over theestimated useful lives of the assets which generally range from 2-15 years forfurniture and equipment, 5-32 years for buildings and improvements and theshorter of the life of the asset or the life of the lease for leaseholdimprovements. Depreciation and amortization expense related to property andequipment for fiscals 2010, 2009 and 2008 was $6,333,000, $6,217,000 and$6,058,000, respectively.

 

***Goodwill and Intangible Assets***

 

Certain of our identifiableintangible assets, including customer relationships, technology, brand names,non-compete agreements and patents, are amortized using the straight-linemethod over their estimated useful lives which range from 3 to 20 years.Additionally, we have recorded goodwill and trademarks and trade names, all ofwhich have indefinite useful lives and are therefore not amortized. All of ourintangible assets and goodwill are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable, and goodwill and intangible assets with indefinite lives arereviewed for impairment at least annually*.*Ourmanagement is primarily responsible for determining if impairment exists andconsiders a number of factors, including third-party valuations, when makingthese determinations. In performing a review for goodwill impairment,management uses a two-step process that begins with an estimation of the fairvalue of the related operating segments by using average fair value results ofthe market multiple and discounted cash flow methodologies, as well as thecomparable transaction methodology when applicable. The first step is a reviewfor potential impairment, and the second step measures the amount ofimpairment, if any. In performing our annual review for indefinite livedintangibles, management compares the current fair value of such assets to theircarrying values. With respect to amortizable intangible assets when 

 

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impairment indicators arepresent, management would determine whether expected future non-discounted cashflows would be sufficient to recover the carrying value of the assets; if not,the carrying value of the assets would be adjusted to their fair value. On July 31,2010, management concluded that none of our intangible assets or goodwill wasimpaired.

 

While the results of theseannual reviews have historically not indicated impairment, impairment reviewsare highly dependent on management’s projections of our future operatingresults and cash flows (which management believes to be reasonable), discountrates based on the Company’s weighted-average cost of capital and appropriatebenchmark peer companies. Assumptions used in determining future operatingresults and cash flows include current and expected market conditions andfuture sales forecasts. Subsequent changes in these assumptions and estimatescould result in future impairment. Although we consistently use the samemethods in developing the assumptions and estimates underlying the fair valuecalculations, such estimates are uncertain by nature and can vary from actualresults.

 

***Long-Lived Assets***

 

We evaluate the carryingvalue of long-lived assets including property, equipment and other assetswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. An assessment is made to determine if the sum of theexpected future non-discounted cash flows from the use of the assets andeventual disposition is less than the carrying value. If the sum of theexpected non-discounted cash flows is less than the carrying value, animpairment loss is recognized based on fair value. With few exceptions, ourhistorical assessments of our long-lived assets have not differed significantlyfrom the actual amounts realized. However, the determination of fair valuerequires us to make certain assumptions and estimates and is highly subjective,and accordingly, actual amounts realized may differ significantly from ourestimates.

 

***Other Assets***

 

Debt issuance costsassociated with the credit facilities are amortized to interest expense overthe life of the credit facilities. As of July 31, 2010 and 2009, such debtissuance costs, net of related amortization, were included in other assets andamounted to $297,000 and $587,000, respectively.

 

***Warranties***

 

We provide for estimatedcosts that may be incurred to remedy deficiencies of quality or performance ofour products at the time of revenue recognition. Most of our products have aone year warranty, although a majority of our endoscope reprocessing equipmentin the United States carries a warranty period of up to fifteen months. Werecord provisions for product warranties as a component of cost of sales basedupon an estimate of the amounts necessary to settle existing and future claimson products sold. The historical relationship of warranty costs to productssold is the primary basis for the estimate. A significant increase in thirdparty service repair rates, the cost and availability of parts or the frequencyof claims could have a material adverse impact on our results for the period orperiods in which such claims or additional costs materialize. Managementreviews its warranty exposure periodically and believes that the warrantyreserves are adequate; however, actual claims incurred could differ fromoriginal estimates, requiring adjustments to the reserves.

 

***Stock-Based Compensation***

 

For fiscal 2005 and earlierperiods, we accounted for stock options using the intrinsic value method underwhich stock compensation expense was not recognized because we granted stockoptions with exercise prices equal to the market value of the shares at thedate of grant. Beginning August 1, 2005, we accounted for stock optionsunder ASC Topic 718, “Compensation-Stock Compensation”, (“ASC 718”), using themodified prospective method for the transition. Under the modified prospectivemethod, stock compensation expense is recognized for any option grant or stockaward granted on or after August 1, 2005, as well as the unvested portionof stock options granted prior to August 1, 2005, based upon the award’sfair value.

 

All of our stock options andstock awards (which consist only of restricted stock) are subject to gradedvesting in which portions of the award vest at different times during thevesting period, as opposed to awards that vest at the end of the vestingperiod. We recognize compensation expense for awards subject to graded vestingusing the straight-line basis over the vesting period, reduced by estimatedforfeitures. Forfeitures are estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. Forfeitures are estimated based on 

 

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historical experience.

 

The stock-based compensationexpense recorded in our Consolidated Financial Statements may not berepresentative of the effect of stock-based compensation expense in futureperiods due to the level of awards issued in past years (which level may not besimilar in the future), modifications to existing awards and assumptions usedin determining fair value, expected lives and estimated forfeitures. Wedetermine the fair value of each stock award using the closing market price ofour Common Stock on the date of grant. We estimate the fair value of eachoption grant on the date of grant using the Black-Scholes option valuationmodel. The determination of fair value using an option-pricing model isaffected by our stock price as well as assumptions regarding a number ofsubjective variables. These variables include, but are not limited to, theexpected stock price volatility over the term of the expected option life(which is determined by using the historical closing prices of our CommonStock), the expected dividend yield (which historically has been 0% and is nowapproximately 0.6% as we began paying dividends in January 2010), and theexpected option life (which is based on historical exercise behavior). Iffactors change and we employ different assumptions in future periods, thecompensation expense that we would record may differ significantly from what wehave recorded in the current period.

 

***Legal Proceedings***

 

In the normal course ofbusiness, we are subject to pending and threatened legal actions. It is ourpolicy to accrue for amounts related to these legal matters if it is probablethat a liability has been incurred and an amount of anticipated exposure can bereasonably estimated. We do not believe that any of these pending claims orlegal actions will have a material effect on our business, financial condition,results of operations or cash flows.

 

***Costs Associated with Exitor Disposal Activities***

 

We recognize costsassociated with exit or disposal activities, such as costs to terminate acontract, the exit or disposal of a business, or the early termination of aleased property, by recognizing the liability at fair value when incurred,except for certain one-time termination benefits, such as severance costs, forwhich the period of recognition begins when a severance plan is communicated toemployees.

 

Inherent in the calculationof liabilities relating to exit and disposal activities are significantmanagement judgments and estimates, including estimates of termination costs,employee attrition and the interest rate used to discount certain expected netcash payments. Such judgments and estimates are reviewed by us on a regularbasis. The cumulative effect of a change to a liability resulting from arevision to either timing or the amount of estimated cash flows is recognizedby us as an adjustment to the liability in the period of the change.

 

Although we havehistorically recorded minimal charges associated with exit or disposalactivities, we recorded charges associated with exit or disposal activities infiscals 2009 and 2008 relating to our restructuring plan for our Netherlandsmanufacturing operations, as further described in Note 18 to the ConsolidatedFinancial Statements.

*** ***

***Earnings Per Common Share***

 

Basic EPS is computed basedupon the weighted average number of common shares outstanding for the year.Diluted EPS is computed based upon the weighted average number of common sharesoutstanding for the year plus the dilutive effect of Common Stock equivalentsusing the treasury stock method and the average market price of our Common Stockfor the year.

 

***Advertising Costs***

 

Our policy is to expenseadvertising costs as they are incurred. Advertising costs charged to expensewere $1,853,000, $1,483,000 and $1,186,000 for fiscals 2010, 2009 and 2008,respectively.

 

***Income******Taxes***

 

We recognize deferred taxassets and liabilities based on differences between the financial statementcarrying amounts and the tax basis of assets and liabilities. Deferred taxassets and liabilities also include items recorded in conjunction with thepurchase accounting for business acquisitions. We regularly review our deferredtax assets for recoverability and establish a valuation allowance, ifnecessary, based on historical taxable income, projected future taxable income,

 

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and the expected timing ofthe reversals of existing temporary differences. Although realization is notassured, management believes it is more likely than not that the recordeddeferred tax assets, as adjusted for valuation allowances, will be realized.Additionally, deferred tax liabilities are regularly reviewed to confirm thatsuch amounts are appropriately stated. A review of our deferred tax itemsconsiders known future changes in various effective tax rates, principally inthe United States. If the effective tax rate were to change in the future,particularly in the United States and to a lesser extent Canada, our items ofdeferred tax could be materially affected. All of such evaluations requiresignificant management judgments.

 

We record liabilities for anunrecognized tax benefit when a tax benefit for an uncertain tax position istaken or expected to be taken on a tax return, but is not recognized in ourConsolidated Financial Statements because it does not meet themore-likely-than-not recognition threshold that the uncertain tax positionwould be sustained upon examination by the applicable taxing authority. Themajority of such unrecognized tax benefits originated from acquisitions and isbased primarily upon management’s assessment of exposure associated withacquired companies. Previously, any adjustments upon resolution of income taxuncertainties that predate or result from acquisitions were recorded as anincrease or decrease to goodwill. On August 1, 2009, we adopted ASC Topic805, “*Business Combinations,*” (“ASC805”), which requires the resolution of income tax uncertainties that predateor result from acquisitions to be recognized in our results of operationsbeginning with fiscal 2010. Unrecognized tax benefits are analyzed periodicallyand adjustments are made as events occur to warrant adjustment to the relatedliability.

 

***Use of Estimates***

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires us to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates. On an ongoing basis, we evaluate theadequacy of our reserves and the estimates used in calculations of reserves aswell as other judgmental financial statement items, including, but not limitedto: collectability of accounts receivable; volume rebates and trade-inallowances; inventory values and obsolescence reserves; warranty reserves;depreciation and amortization periods; deferred income taxes; goodwill andintangible assets; impairment of long-lived assets; unrecognized tax benefitsfor uncertain tax positions; reserves for legal exposure; stock-basedcompensation; and expense accruals.

 

Acquisitions requiresignificant estimates and judgments related to the fair value of assetsacquired and liabilities assumed. Certain liabilities and reserves aresubjective in nature. We reflect such liabilities and reserves based upon themost recent information available. In conjunction with our acquisitions, suchsubjective liabilities and reserves principally include certain income tax andsales and use tax exposures, including tax liabilities related to our foreignsubsidiaries. The ultimate settlement of such liabilities may be for amountswhich are different from the amounts recorded.

 

***Recent Accounting Pronouncements***

 

InJune 2009, the FASB issued Statement of Financial AccountingStandards No. 168, “*The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples, a replacement of FASB Statement No. 162,”* (codifiedas “ASC 105”). ASC 105 establishes the Accounting Standards Codificationas the source of authoritative accounting literature recognized by the FASB tobe applied by nongovernmental entities in addition to rules andinterpretive releases of the Securities and Exchange Commission (“SEC”), whichare sources of authoritative generally accepted accounting principles (“GAAP”)for SEC registrants. All other non-grandfathered, non-SEC accounting literaturenot included in the codification will become non-authoritative. ASC 105identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of the financial statements. Followingthis statement, the FASB will issue new standards in the form of AccountingStandards Updates (“ASU”). This standard became effective for financialstatements for interim and annual reporting periods ending afterSeptember 15, 2009 and therefore was adopted by us on August 1, 2009.As the codification was not intended to change or alter existing GAAP, it didnot have any impact on our Consolidated Financial Statements.

 

InFebruary 2010, the FASB issued ASU 2010-09, *“SubsequentEvents (Topic 855): Amendments to Certain Recognition and DisclosureRequirements,”* (“ASU 2010-09”). ASU 2010-09 addresses practicalissues for SEC registrants with respect to management’s review of subsequentevents by no longer requiring SEC registrants to disclose the date throughwhich management evaluated subsequent events in financial statements. Thischange alleviates potential conflicts with SEC guidance. ASU 2010-09 waseffective immediately upon issuance for all financial statements that had 

 

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notbeen issued or had not become available to be issued. As ASU 2010-09 was notintended to change our subsequent events procedures, it did not have any impacton our Consolidated Financial Statements other than excluding the disclosure ofthe date through which management evaluated subsequent events in thesefinancial statements.

 

InJanuary 2010, the FASB issued ASU 2010-06, “*Fair Value Measurements and Disclosures (Topic 820): ImprovingDisclosures about Fair Value Measurements,”*(“ASU 2010-06”).Reporting entities will have to provide information about movements of assetsamong Levels 1 and 2, and a reconciliation of purchases, sales, issuance, andsettlements of activity valued with a Level 3 method, of the three-tier fairvalue hierarchy established by ASC 820, “*FairValue Measurements and Disclosures,”* (“ASC 820”). ASU 2010-06 also clarifies the existing guidanceto require fair value measurement disclosures for each class of assets andliabilities. ASU 2010-06 is effective for interim and annual reporting periodsbeginning after December 15, 2009 for Level 1 and 2 disclosurerequirements, which was adopted in our third quarter of fiscal 2010, and afterDecember 15, 2010 for Level 3 disclosure requirements, which we will adoptin our third quarter of fiscal 2011 if we have any assets valued with a Level 3method. The adoption of ASU 2010-06 for Level 1 and 2 disclosure requirementsdid not have any impact upon our financial position, results of operations and financialstatement disclosures due to the nature of our Level 1 assets and the lack ofany assets valued with a Level 2 method.

 

InOctober 2009, the FASB issued ASU 2009-13, *“RevenueRecognition (Topic 605): Multiple-Deliverable Arrangements, a consensus of theFASB Emerging Issues Task Force,”* (“ASU 2009-13”), which amends ASC605-25, “*RevenueRecognition-Multiple-Element Arrangements.” *ASU 2009-13provides principles for the allocation of consideration among multiple-elementarrangements, allowing more flexibility in identifying and accounting forseparate deliverables. ASU 2009-13 introduces an estimated selling pricemethod for allocating revenue to the elements of a bundled arrangement ifvendor-specific objective evidence or third-party evidence of selling price isnot available, and significantly expands related disclosurerequirements. This standard is effective on a prospective basis forrevenue arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010, and therefore is effective for ourfiscal 2011. We are currently in the process of evaluating the impact ofASU 2009-13 on our financial position and results of operations.

 

InDecember 2007, the FASB issued ASC 805, “*BusinessCombinations,*” (“ASC 805”), which establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynon-controlling interest in the acquiree and the goodwill acquired. Some of therevised guidance of ASC 805 includes initial capitalization of acquiredin-process research and development, expensing transaction and restructuringcosts and recording contingent consideration payments at fair value, withsubsequent adjustments recorded to net earnings. It also provides disclosurerequirements to enable users of the financial statements to evaluate the natureand financial effects of the business combination. ASC 805 was effectivefor business combinations that occur during or after fiscal years beginningafter December 15, 2008 and therefore was adopted by us on August 1,2009. The adoption of ASC 805 did not have a material effect on our financialposition or results of operations due to the small size and straight-forwardnature of the terms of the Purity acquisition. However, any acquisitions wemake in future periods will be subject to this new accounting guidance, whichmay materially affect our financial position or results of operations ascompared to accounting guidance in effect prior to the adoption of ASC 805.

 

InSeptember 2006, the FASB issued ASC 820. ASC 820 establishes aframework for measuring fair value, clarifies the definition of fair value, andrequires additional disclosures about fair value measurements that are alreadyrequired or permitted by other accounting standards (except for measurements ofshare-based payments) and is expected to increase the consistency of thosemeasurements. ASC 820, as issued, was effective for fiscal years beginningafter November 15, 2007 and therefore was adopted on August 1, 2008with respect to recorded financial assets and financial liabilities. In February 2008,the effective date of ASC 820 was deferred for certain nonfinancial assets andnonfinancial liabilities to fiscal years beginning after November 15, 2008and therefore this portion of ASC 820 was adopted on August 1, 2009. Theimplementation of ASC 820 did not have a material impact on our financialposition or results of operations at either date.

 

InAugust 2009, the FASB issued ASU 2009-05, which amends ASC 820. ASU2009-05 provides amendments for fair value measurements of liabilities. Itprovides clarification that in circumstances in which a quoted price in anactive market for the identical liability is not available, a reporting entityis required to measure fair value using one or more alternatetechniques. ASU 2009-05 also clarifies that when estimating fair value ofa liability, a reporting entity is not required to include a separate input oradjustment to other inputs relating to the existence of a restriction thatprevents the transfer of the liability. ASU 2009-05 was effective for thefirst reporting period (including interim periods)

 

13

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beginningafter issuance and was adopted by us during our first quarter of fiscal 2010. Theadoption of ASU 2009-05 did not have a material impact on our financialposition or results of operations.

 

**3.             Acquisitions**

 

***Post-Fiscal 2010***

 

***Gambro Water***

 

On October 6, 2010, our MarCor subsidiary acquired from Gambro certain net assets and the exclusive rightsin the United States to manufacture and sell Gambro’s water treatment productsused in the production of water for hemodialysis. Immediately following theacquisition, we commenced sales and service of all Gambro water products,components, parts and consumables solely intended for the United States market.The manufacturing of these products will be transitioned into our ownmanufacturing facility in Plymouth, Minnesota over the next few months. With aninstalled base of over 1,200 water equipment customers in the United States andannual pre-acquisition revenues of approximately $14 million (approximately 80%of such revenues are from one customer), the Gambro Acquisition is anticipatedto expand our Water Purification and Filtration’s annual business byapproximately 19% in terms of sales, particularly with respect to product andservice sales volumes in both existing and new dialysis clinics across the UnitedStates. Total consideration for the transaction, excluding transaction costs,was approximately $23,750,000, of which $3,100,000 will be paid in six equalquarterly payments ending April 2012. The Gambro Acquisition will be includedin our Water Purification and Filtration operating segment.

 

The reasons for theacquisition were as follows: (i) the expansion of our water purificationproduct line, particularly in the area of cost effective heat sanitizing waterpurification equipment, (ii) the opportunity to add an installed equipment baseof business into which we can (a) increase service revenue while improving thedensity and efficiency of the Mar Cor service network and (b) increaseconsumable sales per clinic; (iii) the potential revenue and cost savingssynergies and efficiencies that could be realized through optimizing andcombining the acquired assets (including Gambro employees) into Mar Cor; and (iv)the expectation that the acquisition will be accretive to our future earningsper share.

 

Since the acquisition wascompleted on October 6, 2010, the results of operations of Gambro Water are notincluded in our results of operations for any period presented herein. Proforma consolidated statement of income data has not been presented due to the unavailabilityof pre-acquisition Gambro Water financial statements, since Gambro Water didnot maintain separate financial statements related to these purchased assets,and the expected insignificant impact of this acquisition on our consolidatednet income in fiscal 2011 subsequent to its acquisition date.

 

***Fiscal 2010***

 

***PurityWater Company of San Antonio, Inc.***

 

OnJune 1, 2010, Mar Cor acquired all of the issued and outstanding capital stockof Purity, a private company with pre-acquisition annual revenues ofapproximately $2,300,000 based in San Antonio, Texas that designs, installs andservices high quality, high purity water systems for use in laboratory,industrial, medical, pharmaceutical and semiconductor environments. Totalconsideration for the transaction was $2,014,000.

 

The purchase price wasallocated to the assets acquired and assumed liabilities based on estimatedfair values as follows:

 
| ** **                                       | ** ** | **Preliminary** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|
| **Net Assets**                                   | ** ** | **Allocation**  | ** ** |
| Current  assets                                  |       | $               | 493,000    |   |
| Property,  plant and equipment                   |       | 185,000         |       |
| Amortizable  intangible assets:                  |       |            |       |
| Trade  name (3-year life)                        |       | 10,000          |       |
| Non-compete  agreement (5-year life)             |       | 38,000          |       |
| Customer  relationships (9-year life)            |       | 433,000         |       |
| Current  liabilities                             |       | (347,000        | )          |
| Noncurrent  deferred income tax liabilities, net |       | (15,000         | )          |
| Net  assets acquired                             |       | $               | 797,000    |   |

 

There were no in-processresearch and development projects acquired in connection with the acquisition.The excess

 

14

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purchase price of $1,217,000was assigned to goodwill. Such goodwill, all of which is non-deductible forincome tax purposes, has been included in our Water Purification and Filtrationreporting segment.

 

The primary reason for theacquisition was to add a base of business and expand the Mar Cor servicenetwork in the southwest United States. Following the acquisition, Purity wasmerged with and into Mar Cor.

 

The acquisition of Purity isincluded in our results of operations in fiscal 2010 subsequent to itsacquisition date and is excluded fromour results of operations for fiscals 2009 and 2008. Pro formaconsolidated statements of income data have not been presented due to theinsignificant impact of this acquisition.

 

***Fiscal 2009***

 

***G.E.M.Water Systems Int’l, LLC***

 

On July 31, 2009, wepurchased substantially all of the assets, including the building housing its operations, of G.E.M., a private company withpre-acquisition annual revenues of approximately $3,500,000 based in BuenaPark, California that designs, installsand services high quality water and bicarbonate systems for use in dialysisclinics, hospitals and other healthcare facilities. The total consideration forthe transaction, including transaction costs, was $4,468,000.

 

The purchase price wasallocated to the assets acquired and assumed liabilities based on estimatedfair values as follows:

 
| ** **                                                            | ** ** | **Final**      | ** ** |
|-----------------------------------------------------------------------|------------|----------------|------------|
| **Net Assets**                                                        | ** ** | **Allocation** | ** ** |
| Current  assets                                                       |       | $              | 681,000    |   |
| Property,  plant and equipment                                        |       | 1,975,000      |       |
| Amortizable  intangible assets - customer relationships (9-year life) |       | 951,000        |       |
| Non-amortizable  intangible assets - trade names (indefinite life)    |       | 203,000        |       |
| Current  liabilities                                                  |       | (808,000       | )          |
| Net  assets acquired                                                  |       | $              | 3,002,000  |   |

 

There were no in-processresearch and development projects acquired in connection with the acquisition.The excess purchase price of $1,466,000 was assigned to goodwill. Suchgoodwill, all of which is deductible for income tax purposes, has been includedin our Water Purification and Filtration reporting segment.

 

The principal reason for theacquisition was the strengthening ofour sales and service presence and base of business in California with asignificant concentration of dialysis clinics and healthcare institutions.

 

The acquisition of G.E.M. isincluded in our results of operations in fiscal 2010. Since the acquisition ofG.E.M. occurred on the last day of our fiscal 2009, its results of operationsare excluded from fiscals 2009 and2008, but its net assets are included in our Consolidated Balance Sheets atboth July 31, 2010 and 2009. Pro forma consolidated statements of incomedata have not been presented due to the insignificant impact of thisacquisition.

 

***Fiscal 2008***

 

***Strong Dental Products, Inc.***

 

On September 26, 2007, weexpanded our product offerings in our Healthcare Disposables segment bypurchasing all of the issued and outstanding stock of Strong Dental, a privatecompany with pre-acquisition annual revenues of approximately $1,000,000 thatdesigns, markets and sells comfort cushioning and infection control covers forx-ray film and digital x-ray sensors. The total consideration for thetransaction, including transactions costs and assumption of debt, was$4,017,000. Under the terms of the purchase agreement, we agreed to payadditional purchase price up to $700,000 contingent upon the achievement of aspecified revenue target over a three year period. As of July 31, 2010, none ofthe additional consideration had been earned.

 

15

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The purchase price wasallocated to the assets acquired and assumed liabilities based on estimatedfair values as follows:

 
| ** **                                  | ** ** | **Final**      | ** ** |
|---------------------------------------------|------------|----------------|------------|
| **Net Assets**                              | ** ** | **Allocation** | ** ** |
| Cash  and cash equivalents                  |       | $              | 306,000    |   |
| Other  current assets                       |       | 140,000        |       |
| Amortizable  intangible assets:             |       |           |       |
| Patents  (17-year life)                     |       | 144,000        |       |
| Customer  relationships (10-year life)      |       | 650,000        |       |
| Branded  products (5-year life)             |       | 69,000         |       |
| Non-compete  agreements (6-year life)       |       | 30,000         |       |
| Current  liabilities                        |       | (147,000       | )          |
| Noncurrent  deferred income tax liabilities |       | (342,000       | )          |
| Net  assets acquired                        |       | $              | 850,000    |   |

 

There were no in-processresearch and development projects acquired in connection with the acquisition.The excess purchase price of $3,167,000 was assigned to goodwill. Suchgoodwill, all of which is non-deductible for income tax purposes, has beenincluded in our Healthcare Disposables reporting segment.

 

The principal reasons forthe acquisition were to (i) leverage the sales and marketing infrastructure ofCrosstex by adding a branded, technologically differentiated, andpatent-protected product line, (ii) expand into the rapidly growing area ofdigital radiography as dentists convert from film to digital x-rays, and (iii) adda new product line that focuses on the dental hygienist community, whichproduct will aid in cross-selling the recently launched Patient’s ChoiceTM lineof Crosstex products.

 

***Verimetrix, LLC***

 

On September 17, 2007, weexpanded our product offerings in our Endoscope Reprocessing (Medivators®) segment by purchasingcertain net assets from Verimetrix, a private company with pre-acquisitionannual revenues of $2,000,000 that designs, markets and sells the VeriscanTMSystem, an endoscope leak and fluid detection device. The total considerationfor the transaction, including transaction costs, was $4,906,000. Under theterms of the purchase agreement, we agreed to pay additional purchase price upto $4,025,000 contingent upon the achievement of a specified cumulative revenuetarget over a six year period. As of July 31, 2010, none of the additionalconsideration had been earned.

 

The purchase price wasallocated to the assets acquired and assumed liabilities based on estimatedfair values as follows:

 
| ** **                            | ** ** | **Final**      | ** ** |
|---------------------------------------|------------|----------------|------------|
| **Net Assets**                        | ** ** | **Allocation** | ** ** |
| Current  assets                       |       | $              | 948,000    |   |
| Property  and equipment               |       | 146,000        |       |
| Amortizable  intangible assets:       |       |           |       |
| Customer  relationships (1-year life) |       | 165,000        |       |
| Branded  products (3-year life)       |       | 281,000        |       |
| Technology  (17-year life)            |       | 532,000        |       |
| Other  assets                         |       | 166,000        |       |
| Current  liabilities                  |       | (415,000       | )          |
| Noncurrent  liabilities               |       | (65,000        | )          |
| Net  assets acquired                  |       | $              | 1,758,000  |   |

 

There were no in-processresearch and development projects acquired in connection with the acquisition.The excess purchase price of $3,148,000 was assigned to goodwill. Suchgoodwill, all of which is deductible for income tax purposes, has been includedin our Endoscope Reprocessing reporting segment.

 

The principal reasons forthe acquisition were to (i) add a technologically advanced product that fitssquarely in our existing customer call pattern for Medivators products, (ii) leverageour national, direct hospital field sales force and

 

16

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their in-depth knowledge ofthe endoscopy market, and (iii) equip our sales force with a broad andcomprehensive product line ranging from pre-cleaning detergents, flushing aidsand leak testing equipment, to automated disinfection equipment andchemistries.

 

***Dialysis Services, Inc.***

 

On August 1, 2007, wepurchased the water-related assets of DSI, a company with pre-acquisitionannual revenues of approximately $1,200,000 based in Springfield, Tennesseethat designs, installs and services high quality water and bicarbonate systemsfor use in dialysis clinics, hospitalsand university settings. The total consideration for the transaction, includingtransaction costs, was $1,250,000.

 

The purchase price wasallocated to the assets acquired and assumed liabilities based on estimatedfair values as follows:

 
| ** **                            | ** ** | **Final**      | ** ** |
|---------------------------------------|------------|----------------|------------|
| **Net Assets**                        | ** ** | **Allocation** | ** ** |
| Current  assets                       |       | $              | 122,000    |   |
| Amortizable  intangible assets:       |       |           |       |
| Customer  relationships (4-year life) |       | 182,000        |       |
| Non-compete  agreements (5-year life) |       | 34,000         |       |
| Property  and equipment               |       | 73,000         |       |
| Current  liabilities                  |       | (18,000        | )          |
| Net  assets acquired                  |       | $              | 393,000    |   |

 

There were no in-processresearch and development projects acquired in connection with the acquisition.The excess purchase price of $857,000 was assigned to goodwill. Such goodwill,all of which is deductible for income tax purposes, has been included in ourWater Purification and Filtration reporting segment.

 

The principal reason for theacquisition was the strengthening ofour sales and service presence and base of business in a region with asignificant concentration of dialysis clinics and healthcare institutions.

 

The acquisitions of DSI,Verimetrix and Strong Dental areincluded in our results of operations in fiscals 2010 and 2009 and the portionof fiscal 2008 subsequent to the respective acquisition dates. Theseacquisitions had an insignificant effect on our results of operationsdue to the small size of these businesses. Pro forma consolidated statements ofincome data for fiscal 2008 have not been presented due to the insignificantimpact of these acquisitions individually and in the aggregate.

 

**4.             Inventories**

 

A summary of inventories isas follows:

 
| ** **               | ** ** | **July 31,** | ** ** |
|--------------------------|------------|--------------|------------|
| ** **               | ** ** | **2010**     | ** ** | **2009** | ** ** |
|                     |       |         |       |   |   |
| Raw  materials and parts |       | $            | 14,003,000 |   | $ | 10,980,000 |   |
| Work-in-process          |       | 5,153,000    |       | 3,074,000 |   |
| Finished  goods          |       | 15,466,000   |       | 15,146,000 |   |
| Total                    |       | $            | 34,622,000 |   | $ | 29,200,000 |   |

 

**5.**             **FinancialInstruments**

 

We account for derivativeinstruments and hedging activities in accordance with ASC 815, *“Derivatives and Hedging,”* (“ASC 815”), which requires theCompany to recognize all derivatives on the balance sheet at fair value.Derivatives that are not designated as hedges must be adjusted to fair valuethrough earnings. If the derivative is designated as a hedge, depending on thenature of the hedge, changes in the fair value of the derivative will either beoffset against the change in the fair value of the hedged assets, liabilitiesor firm commitments through earnings or recognized in other comprehensive incomeuntil the hedged item is recognized in earnings. The ineffective portion of thechange in fair value of a derivative that is designated as a hedge will berecognized immediately in earnings. As of July 31, 2010, all of our derivativeswere

 

17

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designated as hedges.

 

Changes in the value of (i) theCanadian dollar against the United States dollar, (ii) the euro against theUnited States dollar and (iii) the British pound against the United Statesdollar affect our results of operations because a portion of the net assets ofour Canadian subsidiaries (which are reported in our Specialty Packaging andWater Purification and Filtration segments) and Minntech’s Netherlandssubsidiary (which are reported in our Dialysis and Endoscope Reprocessingsegments) are denominated and ultimately settled in United States dollars butmust be converted into its functional Canadian dollar or euro currency.Furthermore, as part of the restructuring of our Netherlands subsidiary, asfurther described in Note 18 to the Consolidated Financial Statements, certaincash bank accounts, accounts receivable and liabilities of our United Statessubsidiaries, Minntech and Mar Cor, are now denominated and ultimately settledin euros or British pounds but must be converted into our functional UnitedStates currency.

 

In order to hedge againstthe impact of fluctuations in the value of (i) the Canadian dollar relative tothe United States dollar, (ii) the euro relative to the United States dollarand (iii) the British pound relative to the United States dollar on theconversion of such net assets into the functional currencies, we enter intoshort-term contracts to purchase Canadian dollars, euros and British poundsforward, which contracts are generally one month in duration. These short-termcontracts are designated as fair value hedge instruments. There were threeforeign currency forward contracts with an aggregate value of $4,254,000 at July31, 2010, which covered certain assets and liabilities that were denominated incurrencies other than our subsidiaries’ functional currencies. Such contractsexpired on August 31, 2010. These foreign currency forward contracts arecontinually replaced with new one-month contracts as long as we have significantnet assets at our subsidiaries that are denominated and ultimately settled incurrencies other than their functional currencies. Under our credit facilities,such contracts to purchase Canadian dollars, euros and British pounds may notexceed $12,000,000 in an aggregate notional amount at any time. In fiscals2010, 2009 and 2008, such forward contracts partially offset the impact onoperations relating to certain assets and liabilities that were denominated incurrencies other than our subsidiaries’ functional currencies and resulted in anet currency conversion loss, net of tax, of $100,000, $200,000 and $230,000,respectively, on the items hedged. Gains and losses related to the hedgingcontracts to buy Canadian dollars, euros and British pounds forward wereimmediately realized within general and administrative expenses due to theshort-term nature of such contracts. We do not hold any derivative financialinstruments for speculative or trading purposes.

 

On August 1, 2008, weadopted ASC 820 for our financial assets and liabilities. ASC 820 defines fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date. ASC 820 establishes a three level fair value hierarchy toprioritize the inputs used in valuations, as defined below:

 

Level 1: Observable inputsthat reflect unadjusted quoted prices for identical assets or liabilities inactive markets.

 

Level 2: Inputs other thanquoted prices included within Level 1 that are observable for the asset orliability, either directly or indirectly.

 

Level 3: Unobservable inputsfor the asset or liability.

 

The fair values of theCompany’s financial instruments measured on a recurring basis were categorizedas follows:

 
| ** **                                 | ** ** | **July 31,  2010** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **Level  1**       | ** ** | **Level  2** | ** ** | **Level  3** | ** ** | **Total** | ** ** |
| Cash  and cash equivalents:                |       |               |       |   |   |   |   |   |   |
| Bank  deposits and certificates of deposit |       | $                  | 17,696,000 |   | $ | — |   | $ | — |   | $ | 17,696,000 |   |
| Money  markets                             |       | 4,916,000          |       | — |   | — |   | 4,916,000 |   |
| Total  cash and cash equivalents           |       | $                  | 22,612,000 |   | $ | — |   | $ | — |   | $ | 22,612,000 |   |

 
| ** **                                 | ** ** | **July 31,  2009** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **Level  1**       | ** ** | **Level  2** | ** ** | **Level  3** | ** ** | **Total** | ** ** |
| Cash  and cash equivalents:                |       |               |       |   |   |   |   |   |   |
| Bank  deposits and certificates of deposit |       | $                  | 11,821,000 |   | $ | — |   | $ | — |   | $ | 11,821,000 |   |
| Money  markets                             |       | 11,547,000         |       | — |   | — |   | 11,547,000 |   |
| Total  cash and cash equivalents           |       | $                  | 23,368,000 |   | $ | — |   | $ | — |   | $ | 23,368,000 |   |

 

18

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As of July 31, 2010 and2009, the carrying amounts for cash and cash equivalents, accounts receivableand accounts payable approximated fair value due to the short maturity of theseinstruments. We believe that as of July 31, 2010 and 2009, the fair value ofour outstanding borrowings under our credit facilities approximated thecarrying value of those obligations since the borrowing rates were comparableto market interest rates.

 

**6.             Intangibles and Goodwill**

 

Our intangible assets withdefinite lives consist primarily of customer relationships, technology, brandnames, non-compete agreements and patents. These intangible assets are beingamortized on the straight-line method over the estimated useful lives of theassets ranging from 3-20 years and have a weighted average amortization periodof 10 years. Amortization expense related to intangible assets was $5,105,000,$5,152,000 and $5,674,000 for fiscals 2010, 2009 and 2008, respectively. Ourintangible assets that have indefinite useful lives and therefore are notamortized consist of trademarks and trade names.

 

The Company’s intangibleassets consist of the following:

 
| ** **                            | ** ** | **July 31,  2010** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | ** **         | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Gross**          | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Intangible  assets with finite lives: |       |               |       |   |   |   |   |
| Customer  relationships               |       | $                  | 26,205,000 |   | $ | (12,102,000 | ) | $ | 14,103,000 |   |
| Technology                            |       | 9,267,000          |       | (6,085,000 | ) | 3,182,000 |   |
| Brand  names                          |       | 9,556,000          |       | (4,829,000 | ) | 4,727,000 |   |
| Non-compete  agreements               |       | 1,901,000          |       | (1,536,000 | ) | 365,000 |   |
| Patents  and other registrations      |       | 1,251,000          |       | (307,000 | ) | 944,000 |   |
|                                  |       | 48,180,000         |       | (24,859,000 | ) | 23,321,000 |   |
| Trademarks  and tradenames            |       | 9,396,000          |       | — |   | 9,396,000 |   |
| Total  intangible assets              |       | $                  | 57,576,000 |   | $ | (24,859,000 | ) | $ | 32,717,000 |   |

 
| ** **                            | ** ** | **July 31,  2009** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | ** **         | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Gross**          | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Intangible  assets with finite lives: |       |               |       |   |   |   |   |
| Customer  relationships               |       | $                  | 26,977,000 |   | $ | (10,592,000 | ) | $ | 16,385,000 |   |
| Technology                            |       | 9,345,000          |       | (5,304,000 | ) | 4,041,000 |   |
| Brand  names                          |       | 9,546,000          |       | (3,798,000 | ) | 5,748,000 |   |
| Non-compete  agreements               |       | 1,863,000          |       | (1,223,000 | ) | 640,000 |   |
| Patents  and other registrations      |       | 1,140,000          |       | (221,000 | ) | 919,000 |   |
|                                  |       | 48,871,000         |       | (21,138,000 | ) | 27,733,000 |   |
| Trademarks  and tradenames            |       | 9,309,000          |       | — |   | 9,309,000 |   |
| Total  intangible assets              |       | $                  | 58,180,000 |   | $ | (21,138,000 | ) | $ | 37,042,000 |   |

 

Estimated annualamortization expense of our intangible assets for the next five years is asfollows:

 

| **Year Ending  July 31,** | ** ** |
|---------------------------|------------|
| 2011                      |       | $ | 4,820,000 |   |
| 2012                      |       | 4,355,000 |   |
| 2013                      |       | 4,281,000 |   |
| 2014                      |       | 4,087,000 |   |
| 2015                      |       | 3,912,000 |   |
|                           |            |  |  |  |

 

19

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Goodwill changed duringfiscals 2010 and 2009 as follows:

 
| ** **                                                             | ** ** | **Water**          | ** ** | ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** **    | ** ** | ** **   | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|-----------------|------------|--------------|------------|------------------|------------|---------------|------------|--------------|------------|
| ** **                                                             | ** ** | **Purification**   | ** ** | **Healthcare**  | ** ** | ** **   | ** ** | **Endoscope**    | ** ** | ** **    | ** ** | **Total**    | ** ** |
| ** **                                                             | ** ** | **and Filtration** | ** ** | **Disposables** | ** ** | **Dialysis** | ** ** | **Reprocessing** | ** ** | **All Other** | ** ** | **Goodwill** | ** ** |
|                                                                   |       |               |       |            |       |         |       |             |       |          |       |         |       |
| Balance,  July 31, 2008                                                |       | $                  | 37,191,000 |            | $          | 50,473,000   |       | $                | 8,133,000  |          | $          | 9,648,000    |       | $ | 8,513,000 |   | $ | 113,958,000 |   |
| Acquisitions                                                           |       | 1,466,000          |       | —          |       | —       |       | —           |       | —        |       | 1,466,000    |       |
| Earnout  on acquisitions                                               |       | —             |       | 157,000         |       | —       |       | —           |       | —        |       | 157,000      |       |
| Adjustments  primarily relating to income tax exposure of acquisitions |       | (38,000            | )          | —          |       | —       |       | —           |       | —        |       | (38,000      | )          |
| Foreign  currency translation                                          |       | (244,000           | )          | —          |       | —       |       | —           |       | (304,000      | )          | (548,000     | )          |
| Balance,  July 31, 2009                                                |       | 38,375,000         |       | 50,630,000      |       | 8,133,000    |       | 9,648,000        |       | 8,209,000     |       | 114,995,000  |       |
| Acquisitions                                                           |       | 1,217,000          |       | —          |       | —       |       | —           |       | —        |       | 1,217,000    |       |
| Foreign  currency translation                                          |       | 255,000            |       | —          |       | —       |       | —           |       | 316,000       |       | 571,000      |       |
| Balance,  July 31, 2010                                                |       | $                  | 39,847,000 |            | $          | 50,630,000   |       | $                | 8,133,000  |          | $          | 9,648,000    |       | $ | 8,525,000 |   | $ | 116,783,000 |   |

 

On July 31, 2010 and 2009,we performed impairment studies of the Company’s goodwill, trademarks and tradenames and concluded that such assets were not impaired.

 

**7.             Warranties**

 

A summary of activity in thewarranty reserves follows:

 
| ** **                    | ** ** | **Year Ended  July 31,** | ** ** |
|-------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **2010**                 | ** ** | **2009** | ** ** |
|                          |       |                     |       |   |   |
| Beginning  balance            |       | $                        | 949,000    |   | $ | 916,000 |   |
| Acquisitions                  |       | 10,000                   |       | 10,000 |   |
| Provisions                    |       | 1,826,000                |       | 1,345,000 |   |
| Charges                       |       | (1,605,000               | )          | (1,281,000 | ) |
| Foreign  currency translation |       | 1,000                    |       | (41,000 | ) |
| Ending  Balance               |       | $                        | 1,181,000  |   | $ | 949,000 |   |

 

The warranty provisions andcharges during fiscals 2010 and 2009 relate principally to the Company’sendoscope reprocessing and water purification products. Warranty reserves areincluded in accrued expenses in the Consolidated Balance Sheets.

 

**8.             Financing Arrangements**

 

In conjunction with theacquisition of Crosstex, we entered into amended and restated credit facilitiesdated as of August 1, 2005 (the “U.S. Credit Facilities”) with a consortium oflenders to fund the cash consideration paid in the acquisition and costsassociated with the acquisition, as well as to modify our existing UnitedStates credit facilities. The U.S. Credit Facilities, as amended, include (i) asix-year $40.0 million senior secured amortizing term loan facility expiring August1, 2011 and (ii) a five-year $50.0 million senior secured revolving creditfacility that was scheduled to expire on August 1, 2010. Amounts we repay underthe term loan facility may not be re-borrowed. On May 28, 2010, we amended theU.S. Credit Facilities, which amendment included the extension of thetermination date for the revolving credit facility to August 1, 2011. Debtissuance costs relating to the U.S. Credit Facilities were recorded in otherassets and are being amortized over the life of the credit facilities. Suchunamortized debt issuance costs amounted to approximately $297,000 at July 31,2010.

 

At July 31, 2010, borrowingsunder the U.S. Credit Facilities bear interest at rates ranging from 0.50% to1.50% above the lender’s base rate, or at rates ranging from 1.50% to 2.50%above the London Interbank Offered Rate (“LIBOR”), depending upon ourconsolidated ratio of debt to earnings before interest, taxes, depreciation andamortization, and as further adjusted under the terms of the U.S. CreditFacilities (“EBITDA”). At July 31, 2010, the lender’s base rate was 3.25% andthe LIBOR rates applicable to our outstanding borrowings ranged from 0.35% to1.21%. The margins

 

20

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applicable to ouroutstanding borrowings at July 31, 2010 were 0.50% above the lender’s base rateand 1.50% above LIBOR. All of our outstanding borrowings were under LIBORcontracts at July 31, 2010. The U.S. Credit Facilities also provide for fees onthe unused portion of our facilities at rates ranging from 0.20% to 0.40%,depending upon our consolidated ratio of debt to EBITDA; such rate was 0.20% atJuly 31, 2010.

 

TheU.S. Credit Facilities require us to meet certain financial covenants and aresecured by (i) substantially all of our U.S.-based assets (including assets ofCantel, Minntech, Mar Cor, Crosstex, and Strong Dental) and (ii) our pledge ofall of the outstanding shares of Minntech, Mar Cor, Crosstex and Strong Dentaland 65% of the outstanding shares of our foreign-based subsidiaries.Additionally, we are not permitted to pay cash dividends on our Common Stock inexcess of $3,000,000 without the consent of our United States lenders. As of July31, 2010, we were in compliance with all financial and other covenants underthe U.S. Credit Facilities.

 

On July 31, 2010, we had$21,000,000 of outstanding borrowings under the U.S. Credit Facilities, whichconsisted of $10,000,000 and $11,000,000 under the term loan facility and therevolving credit facility, respectively, and $39,000,000 was available to beborrowed under our revolving credit facility. In September 2010, we repaid$6,000,000 under the revolving credit facility and $2,500,000 under our termloan facility reducing our total outstanding borrowings to $12,500,000 by theend of September. In October, we borrowed $20,500,000 under our revolvingcredit facility to fund a portion of the purchase price of the GambroAcquisition. The maturities of our credit facilities are described in Note 10to the Consolidated Financial Statements.

 

The U.S. Credit Facilitieshave a termination date of August 1, 2011. Although we may repay a portion ofour outstanding borrowings throughout fiscal 2011, we do not presentlyanticipate paying off the revolving credit facility in full by its terminationdate. We are in discussions with our bank syndicate regarding modifications tosuch facility and expect to formally modify the facility before the expirationdate. However, since any modification will not be completed until later infiscal 2011, we will be required to reclassify the entire outstanding balanceof the revolver from long-term to current in periods subsequent to July 31,2010.

 

**9.             Income Taxes**

 

Theconsolidated effective tax rate from operations was 36.8%, 37.6% and 37.2% forfiscals 2010, 2009, and 2008, respectively, and reflects income tax expense forour United States and international operations at their respective statutoryrates.

 

The provision for incometaxes from operations consists of the following:

 
| ** **      | ** ** | **Year Ended  July 31,** | ** ** |
|-----------------|------------|--------------------------|------------|
| ** **      | ** ** | **2010**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **      | ** ** | **Current**              | ** ** | **Deferred** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Current** | ** ** | **Deferred** | ** ** |
|            |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| United  States: |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Federal         |       | $                        | 11,884,000 |   | $ | (1,911,000 | ) | $ | 9,165,000 |   | $ | (1,282,000 | ) | $ | 5,336,000 |   | $ | (1,418,000 | ) |
| State           |       | 1,417,000                |       | (118,000 | ) | 1,610,000 |   | (402,000 | ) | 1,081,000 |   | (408,000 | ) |
| Canada          |       | 410,000                  |       | (177,000 | ) | 545,000 |   | (327,000 | ) | 657,000 |   | (306,000 | ) |
| Singapore       |       | 100,000                  |       | (19,000 | ) | 76,000 |   | — |   | — |   | — |   |
| Netherlands     |       | 26,000                   |       | — |   | — |   | — |   | 26,000 |   | — |   |
| Japan           |       | 2,000                    |       | — |   | 2,000 |   | — |   | — |   | 190,000 |   |
| Total           |       | $                        | 13,839,000 |   | $ | (2,225,000 | ) | $ | 11,398,000 |   | $ | (2,011,000 | ) | $ | 7,100,000 |   | $ | (1,942,000 | ) |

 

21

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The geographic components ofincome from operations before income taxes are as follows:

 
| ** **     | ** ** | **Year Ended  July 31,** | ** ** |
|----------------|------------|--------------------------|------------|
| ** **     | ** ** | **2010**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|           |       |                     |       |   |   |   |   |
| United  States |       | $                        | 30,016,000 |   | $ | 23,566,000 |   | $ | 13,330,000 |   |
| Canada         |       | 1,030,000                |       | 1,296,000 |   | 1,563,000 |   |
| Netherlands    |       | 106,000                  |       | (285,000 | ) | (925,000 | ) |
| Japan          |       | (283,000                 | )          | (201,000 | ) | (133,000 | ) |
| Singapore      |       | 686,000                  |       | 580,000 |   | 16,000 |   |
| Total          |       | $                        | 31,555,000 |   | $ | 24,956,000 |   | $ | 13,851,000 |   |

 

The effective tax rate fromoperations differs from the United States statutory tax rate (35.0% in 2010 and2009 and 34.2% in 2008) due to the following:

 
| ** **                                        | ** ** | **Year Ended  July 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|
| ** **                                        | ** ** | **2010**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                              |       |                     |       |   |   |   |   |
| Expected  statutory tax                           |       | $                        | 11,044,000 |   | $ | 8,735,000 |   | $ | 4,737,000 |   |
| Differential  attributable to foreign operations: |       |                     |       |   |   |   |   |
| Canada                                            |       | (126,000                 | )          | (235,000 | ) | (186,000 | ) |
| Netherlands                                       |       | (11,000                  | )          | 100,000 |   | 342,000 |   |
| Japan                                             |       | 101,000                  |       | 72,000 |   | 236,000 |   |
| Singapore                                         |       | (159,000                 | )          | (127,000 | ) | (6,000 | ) |
| State  and local taxes                            |       | 859,000                  |       | 785,000 |   | 443,000 |   |
| Extraterritorial  income exclusion                |       | —                   |       | — |   | (20,000 | ) |
| Stock  option expense                             |       | (96,000                  | )          | (193,000 | ) | (101,000 | ) |
| Tax  reserve provision                            |       | 165,000                  |       | — |   | (58,000 | ) |
| Domestic  production deduction                    |       | (447,000                 | )          | (449,000 | ) | (219,000 | ) |
| Taxes  on foreign dividends                       |       | 262,000                  |       | 493,000 |   | — |   |
| R&E  tax credit                               |       | (72,000                  | )          | (197,000 | ) | — |   |
| Change  in our U.S. Federal tax rate              |       | —                   |       | 287,000 |   | (41,000 | ) |
| Other                                             |       | 94,000                   |       | 116,000 |   | 31,000 |   |
| Total  income tax expense                         |       | $                        | 11,614,000 |   | $ | 9,387,000 |   | $ | 5,158,000 |   |

 

22

----

 

Deferred income tax assetsand liabilities from operations are comprised of the following:

 
| ** **                                | ** ** | **July 31,** | ** **  |
|-------------------------------------------|------------|--------------|-------------|
| ** **                                | ** ** | **2010**     | ** **  | **2009** | ** ** |
| Current  deferred tax assets:             |       |         |        |   |   |
| Accrued  expenses                         |       | $            | 1,268,000   |   | $ | 957,000 |   |
| Inventories                               |       | 968,000      |        | 929,000 |   |
| Accounts  receivable                      |       | 327,000      |        | 385,000 |   |
| Subtotal                                  |       | 2,563,000    |        | 2,271,000 |   |
| Valuation  allowance                      |       | (143,000     | )           | (373,000 | ) |
|                                      |       | $            | 2,420,000   |   | $ | 1,898,000 |   |
| Non-current  deferred tax assets:         |       |         |        |   |   |
| Other  long-term liabilities              |       | $            | 456,000     |   | $ | 597,000 |   |
| Stock-based  compensation                 |       | 1,868,000    |        | 2,595,000 |   |
| Foreign  tax credit                       |       | 294,000      |        | 1,058,000 |   |
| Domestic  NOLs                            |       | 167,000      |        | — |   |
| Foreign  NOLs                             |       | 1,426,000    |        | 1,705,000 |   |
| Subtotal                                  |       | 4,211,000    |        | 5,955,000 |   |
| Valuation  allowance                      |       | (1,615,000   | )           | (2,466,000 | ) |
|                                      |       | 2,596,000    |        | 3,489,000 |   |
| Non-current  deferred tax liabilities:    |       |         |        |   |   |
| Property  and equipment                   |       | (5,306,000   | )           | (5,841,000 | ) |
| Intangible  assets                        |       | (9,350,000   | )           | (10,669,000 | ) |
| Goodwill                                  |       | (2,422,000   | )           | (1,565,000 | ) |
| Cumulative  translation adjustment        |       | (3,070,000   | )           | (1,767,000 | ) |
| Tax  on unremitted foreign earnings       |       | (316,000     | )           | (25,000 | ) |
|                                      |       | (20,464,000  | )           | (19,867,000 | ) |
| Net  non-current deferred tax liabilities |       | $            | (17,868,000 | ) | $ | (16,378,000 | ) |

 

Deferred tax assets andliabilities have been adjusted for changes in statutory tax rates asappropriate. Such changes only have a significant impact in the United States, andto a lesser extent in Canada, where substantially all of our deferred tax itemsexist. Such deferred tax items existing in the United States reflect a combinedU.S. Federal and state effective rate of approximately 37.7% and 38.1% forfiscals 2010 and 2009, respectively.

 

At July 31, 2010, we had netoperating loss carryforwards (“NOLs”) for domestic tax reporting purposes of$478,000 which originated from the Purity acquisition and will begin to expireon July 31, 2029. For foreign tax reporting purposes, our NOLs at July 31, 2010are approximately $6,031,000. Of this amount NOLs from our Japanese subsidiarytotal approximately $1,065,000 and will begin to expire on July 31, 2013 andNOLs from our Netherlands subsidiary total approximately $4,966,000 and willbegin to expire on July 31, 2016. During fiscal 2008, we decided to place afull valuation allowance against the NOLs of our Japanese subsidiary. Fullvaluation allowances have been established for all of the foreign NOLs as wecurrently believe it is more likely than not that we will not utilize suchNOLs.

 

During fiscal 2010, nodividends were repatriated from our foreign subsidiaries. However, we haveprovided U.S. federal and state income taxes and foreign withholding taxesrelated to an anticipated repatriation from one of our Canadian subsidiaries infiscal 2011. During fiscal 2009, we repatriated dividends of approximately$11,400,000 from our foreign subsidiaries for which we provided U.S. Federaland state income taxes and foreign withholding taxes. During fiscal 2008, nodividends were repatriated from our foreign subsidiaries.

 

We have a deferred tax assetof $294,000 related to a foreign tax credit that resulted from a dividendrepatriation during fiscal 2006. This foreign tax credit carryover expires on July31, 2016.  A valuation allowance wasestablished against the foreign tax credit in fiscal 2006. The valuationallowance decreased during fiscal 2010 by approximately $1,034,000. Thedecrease was mainly attributable to additional foreign source income generatedduring fiscal 2010 due to the foreign dividend repatriation and the fiscal 2011anticipated repatriation for which taxes have been provided. As we currently donot expect significant future additional foreign source income, a valuationallowance has been

 

23

----

 

established for this foreigntax credit as we currently believe that it is more likely than not that we willnot utilize such foreign tax credit.

 

Wedecreased our overall valuation allowances during fiscal 2010 by $1,081,000,from $2,839,000 at July 31, 2009 to $1,758,000 at July 31, 2010, primarily dueto the decrease in the foreign tax credit valuation allowance.

 

A portion of theundistributed earnings of our foreign subsidiaries, which relate to ourCanadian operations, amounting to approximately $7,867,000 was considered to beindefinitely reinvested at July 31, 2010. Accordingly, no provision has beenmade for United States income taxes that might result from repatriation of theseearnings.

 

We record liabilities for anunrecognized tax benefit when a tax benefit for an uncertain tax position istaken or expected to be taken on a tax return, but is not recognized in ourConsolidated Financial Statements because it does not meet themore-likely-than-not recognition threshold that the uncertain tax positionwould be sustained upon examination by the applicable taxing authority. The taxbenefits recognized in the financial statements from such a position aremeasured based on the largest benefit that has a greater than fifty percentlikelihood of being realized upon settlement with the tax authorities. Themajority of our unrecognized tax benefits originated from acquisitions.Previously, any adjustments upon resolution of income tax uncertainties thatpredate or result from acquisitions were recorded as an increase or decrease togoodwill. On August 1, 2009, we adopted ASC 805 which requires the resolutionof income tax uncertainties that predate or result from acquisitions to be recognizedin our results of operations beginning with fiscal 2010. However, if ourunrecognized tax benefits are recognized in our financial statements in futureperiods, there would not be a significant impact to our overall effective taxrate due to the size of the unrecognized tax benefits in relation to our incomebefore income taxes. Except for decreases due to the lapse of applicablestatutes of limitation, we do not expect such unrecognized tax benefits tosignificantly decrease or increase in the next twelve months.

 

A reconciliation of thebeginning and ending amounts of gross unrecognized tax benefits is as follows:

 
| ** **                                  | ** ** | **Unrecognized** | ** ** |
|---------------------------------------------|------------|------------------|------------|
| ** **                                  | ** ** | **Tax Benefits** | ** ** |
|                                        |       |             |       |
| Unrecognized  tax benefits on July 31, 2008 |       | $                | 427,000    |   |
| Lapse  of statute of limitations            |       | (47,000          | )          |
| Unrecognized  tax benefits on July 31, 2009 |       | 380,000          |       |
| Lapse  of statute of limitations            |       | (172,000         | )          |
| Unrecognized  tax benefits on July 31, 2010 |       | $                | 208,000    |   |

 

Generally, the Company is nolonger subject to federal, state or foreign income tax examinations for fiscalyears ended prior to July 31, 2004.

 

Our policy is to recordpotential interest and penalties related to income tax positions in interestexpense and general and administrative expense, respectively, in ourConsolidated Financial Statements. However, such amounts have been relativelyinsignificant due to the amount of our unrecognized tax benefits relating touncertain tax positions.

 

24

----

 

 

**10.          Commitments and Contingencies**

 

***Long-term contractualobligations***

 

As of July 31, 2010,aggregate annual required payments over the next five years and thereafterunder our contractual obligations that have long-term components are asfollows:

 
| ** **                                                  | ** ** | **Year Ended July 31,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                  | ** ** | **(Amounts in thousands)**   | ** ** |
| ** **                                                  | ** ** | **2011**                               | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **2015** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                                        |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Maturities  of the credit facilities (1)                    |       | $                                      | 10,000     |   | $ | 11,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 21,000 |   |
| Expected  interest payments under the credit facilities (2) |       | 340                                    |       | 1 |   | — |   | — |   | — |   | — |   | 341 |   |
| Minimum  commitments under noncancelable operating leases   |       | 3,181                                  |       | 2,375 |   | 1,705 |   | 1,370 |   | 1,005 |   | 5,574 |   | 15,210 |   |
| Minimum  commitments under noncancelable capital leases     |       | 14                                     |       | — |   | — |   | — |   | — |   | — |   | 14 |   |
| Deferred  compensation and other                            |       | 406                                    |       | 264 |   | 38 |   | 33 |   | 34 |   | 132 |   | 907 |   |
| Employment  agreements                                      |       | 3,073                                  |       | 356 |   | — |   | — |   | — |   | — |   | 3,429 |   |
| Total  contractual obligations                              |       | $                                      | 17,014     |   | $ | 13,996 |   | $ | 1,743 |   | $ | 1,403 |   | $ | 1,039 |   | $ | 5,706 |   | $ | 40,901 |   |

 

----

(1)           As of July 31,2010, annual required payments during the year ending July 31, 2012represent the outstanding balance on the revolving credit facility since the May 28,2010 amendment to our revolving credit facility extended the expiration datefrom August 1, 2010 to August 1, 2011. In September 2010, werepaid $6,000,000 under the revolving credit facility and $2,500,000 under ourterm loan facility reducing our total outstanding borrowings to $12,500,000 atthe end of September. In October, we borrowed $20,500,000 under our revolvingcredit facility to fund a portion of the purchase price of the GambroAcquisition thereby increasing total outstanding borrowings to $33,000,000. Theremaining purchase price of $3,100,000 is payable in six equal quarterlypayments ending April 2012.

 

(2)           The expectedinterest payments under the term and revolving credit facilities reflectinterest rates of 2.37% and 1.93%, respectively, which were our interest rateson outstanding borrowings at July 31, 2010.

 

***Operating leases***

 

Minimum commitments underoperating leases include minimum rental commitments for our leasedmanufacturing facilities, warehouses, office space and equipment.

 

Six of the more significantleases that contain escalation clauses are two building leases for our WaterPurification and Filtration business, two building leases for our HealthcareDisposables business and two building leases for our Specialty Packagingbusiness. The two Water Purification and Filtration building leases are for theUnited States headquarters in suburban Philadelphia, Pennsylvania and the Canadianheadquarters in suburban Toronto, Ontario. The lease for the Philadelphiabuilding provides for monthly base rent of approximately $16,200 during fiscal2011 and escalates annually to approximately $20,100 in fiscal 2025 when itexpires. The Toronto building lease provides for monthly base rent ofapproximately $16,000 in fiscal 2011 and escalates to approximately $16,800 infiscal 2015 when it expires. Both the Philadelphia and Toronto building leasesare guaranteed by Cantel. The Healthcare Disposables segment has twosignificant building leases with escalation clauses that are used formanufacturing and warehousing. One building in Sharon, Pennsylvania providesfor monthly base rent of approximately $18,100 during fiscal 2011 and escalatesannually to approximately $20,800 in fiscal 2024 when it expires. The secondbuilding lease in Santa Fe Springs, California provides for monthly base rentof approximately $17,700 in fiscal 2011, escalating annually thereafter toapproximately $19,300 in fiscal 2015 when it expires. Additionally, ourSpecialty Packaging segment has two significant building leases with escalationclauses that are used for manufacturing and warehousing. One building

 

25

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lease in Edmonton, Albertais a new lease beginning November 1, 2010 and provides for monthly baserent of approximately $8,100 escalating annually thereafter to approximately$9,049 in fiscal 2021 when it expires. The second building lease in GlenBurnie, Maryland provides for monthly base rent of $6,400 during fiscal 2011and escalates annually to approximately $6,600 in fiscal 2013 when it expires.

 

Rent expense related tooperating leases for fiscal 2010 was recorded on a straight-line basis andaggregated $3,875,000, compared with $3,679,000 and $3,466,000 for fiscals 2009and 2008, respectively.

 

***Deferred compensation***

 

Included in other long-termliabilities are deferred compensation arrangements for certain former Minntechdirectors and officers.

 

***Employment agreements***

 

We have previously enteredinto various employment agreements with executives of the Company, includingour Corporate executive officers and our subsidiary Chief Executive Officers.The majority of such contracts expired and were replaced effective January 1,2010 with severance contracts that defined certain compensation arrangementsrelating to various employment termination scenarios.

 

**11.          Stock-Based Compensation**

 

The following table showsthe income statement components of stock-based compensation expense recognizedin the Consolidated Statements of Income:

 
| ** **                                                              | ** ** | **Year Ended July 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                    |       |                                   |       |   |   |   |   |
| Cost  of sales                                                          |       | $                                      | 130,000    |   | $ | 70,000 |   | $ | 43,000 |   |
| Operating  expenses:                                                    |       |                                   |       |   |   |   |   |
| Selling                                                                 |       | 410,000                                |       | 216,000 |   | 123,000 |   |
| General  and administrative                                             |       | 2,560,000                              |       | 2,884,000 |   | 1,778,000 |   |
| Research  and development                                               |       | 30,000                                 |       | 17,000 |   | 17,000 |   |
| Total  operating expenses                                               |       | 3,000,000                              |       | 3,117,000 |   | 1,918,000 |   |
| Stock-based  compensation before income taxes                           |       | 3,130,000                              |       | 3,187,000 |   | 1,961,000 |   |
| Income  tax benefits                                                    |       | (1,137,000                             | )          | (1,226,000 | ) | (758,000 | ) |
| Total  stock-based compensation expense, net of tax                     |       | $                                      | 1,993,000  |   | $ | 1,961,000 |   | $ | 1,203,000 |   |
|                                                                    |       |                                   |       |   |   |   |   |
| Decrease  in earnings per common share due to stock-based compensation: |       |                                   |       |   |   |   |   |
|                                                                    |       |                                   |       |   |   |   |   |
| Basic                                                                   |       | $                                      | 0.12       |   | $ | 0.12 |   | $ | 0.07 |   |
|                                                                    |       |                                   |       |   |   |   |   |
| Diluted                                                                 |       | $                                      | 0.12       |   | $ | 0.12 |   | $ | 0.07 |   |

 

The above stock-basedcompensation expense before income taxes was recorded in the ConsolidatedFinancial Statements as stock-based compensation expense and an increase toadditional paid-in capital. The related income tax benefits (which pertain onlyto stock awards and options that do not qualify as incentive stock options)were recorded as an increase to long-term deferred income tax assets (which arenetted with long-term deferred income tax liabilities) and a reduction toincome tax expense.

 

On July 31, 2009, weextended the life of 456,001 fully vested “out-of-the-money” stock optionspreviously awarded to certain executive officers (seven individuals in total)under our 1997 Employee Stock Option Plan. Such options were scheduled toexpire within six months after July 31, 2009 and had exercise pricesranging from $17.14 to $22.93, which were greater than the closing price of$15.48 on July 31, 2009, the date the Compensation Committee of our Boardof Directors authorized the modification. The sole modification was to extendthe options’ expiration dates to January 31,

 

26

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2011. All other terms andconditions of the stock options remain the same. As a result of thismodification, approximately $703,000 in additional stock-based compensationexpense was recorded in our Consolidated Financial Statements on July 31,2009, which decreased both basic and diluted earnings per share by $0.03.

 

Most of our stock optionsand stock awards (which consist only of restricted shares) are subject tograded vesting in which portions of the award vest at different times duringthe vesting period, as opposed to awards that vest at the end of the vestingperiod. We recognize compensation expense for awards subject to graded vestingusing the straight-line basis over the vesting period, reduced by estimatedforfeitures. At July 31, 2010, total unrecognized stock-based compensationexpense, before income taxes, related to total nonvested stock options andstock awards was $3,812,000 with a remaining weighted average period of 20months over which such expense is expected to be recognized.

 

We determine the fair valueof each stock award using the closing market price of our Common Stock on thedate of grant. Stock awards were not granted prior to February 1, 2007.Such stock awards are deductible for tax purposes and were tax-effected usingthe Company’s estimated U.S. effective tax rate at the time of grant.

 

A summary of nonvested stockaward activity follows:

 
| ** **                                    | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                    | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
|                                          |       |               |       |                |       |
| Nonvested  stock awards at July 31, 2007 |       | 175,000            |       | $                   | 16.57      |   |
| Granted                                       |       | 130,500            |       | 10.50               |       |
| Canceled                                      |       | (31,421            | )          | 16.25               |       |
| Vested                                        |       | (66,914            | )          | 16.53               |       |
| Nonvested  stock awards at July 31, 2008 |       | 207,165            |       | 12.81               |       |
| Granted                                       |       | 101,000            |       | 14.59               |       |
| Vested                                        |       | (81,837            | )          | 13.42               |       |
| Nonvested  stock awards at July 31, 2009 |       | 226,328            |       | 13.38               |       |
| Granted                                       |       | 47,825             |       | 15.97               |       |
| Vested                                        |       | (115,501           | )          | 13.76               |       |
| Nonvested  stock awards at July 31, 2010 |       | 158,652            |       | $                   | 13.89      |   |

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionvaluation model with the following assumptions for options granted duringfiscals 2010, 2009 and 2008:

 
| **Weighted-Average**           | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| **Black-Scholes Option**  | ** ** | **Year Ended July 31,** | ** ** |
| **Valuation Assumptions** | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|                           |       |                                   |       |       |       |       |       |
| Dividend  yield (1)            |       | 0.06%                                  |       |       | 0.00%      |       |       | 0.00% |   |   |
| Expected  volatility (2)       |       | 0.452                                  |       |       | 0.428      |       |       | 0.340 |   |   |
| Risk-free  interest rate (3)   |       | 1.96%                                  |       |       | 1.74%      |       |       | 2.91% |   |   |
| Expected  lives (in years) (4) |       | 3.68                                   |       |       | 4.06       |       |       | 3.87 |   |   |

 

----

(1) Theweighted average dividend yield was 0.60% for options granted after thedeclaration of our first dividend in January 2010. Previously, we did notissue dividends and therefore the dividend yield was zero. The weighted averagedividend yield for fiscal 2010 was 0.06%.

(2) Volatilitywas based on historical closing prices of our Common Stock.

(3) TheU.S. Treasury rate based on the expected life at the date of grant.

(4) Basedon historical exercise behavior.

 

Additionally, all optionswere considered to be deductible for tax purposes in the valuation model,except for certain incentive options granted under the 1997 Employee Plan andto employees residing outside of the United States. Such

 

27

----

 

non-qualified options weretax-effected using the Company’s estimated U.S. effective tax rate at the timeof grant. In fiscals 2010, 2009 and 2008, the weighted average fair value ofall options granted was $5.71, $5.12 and $3.35, respectively. The aggregateintrinsic value (i.e. the excess market price over the exercise price) of alloptions exercised was approximately $1,672,000, $1,241,000 and $2,361,000 infiscals 2010, 2009 and 2008, respectively. The aggregate fair value of alloptions vested was approximately $1,069,000, $1,036,000 and $1,475,000 infiscals 2010, 2009 and 2008, respectively.

 

A summary of stock optionactivity follows:

 
| ** **                            | ** ** | ** **         | ** ** | **Weighted**            | ** ** |
|---------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **Number of** | ** ** | **Average**             | ** ** |
| ** **                            | ** ** | **Shares**         | ** ** | **Exercise Price** | ** ** |
|                                  |       |               |       |                    |       |
| Outstanding  at July 31, 2007    |       | 1,848,846          |       | $                       | 14.55      |   |
| Granted                               |       | 383,250            |       | 10.95                   |       |
| Canceled                              |       | (183,001           | )          | 16.68                   |       |
| Exercised                             |       | (291,303           | )          | 6.23                    |       |
| Expired                               |       | (3,375             | )          | 8.63                    |       |
| Outstanding  at July 31, 2008    |       | 1,754,417          |       | 14.94                   |       |
| Granted                               |       | 106,250            |       | 14.33                   |       |
| Canceled                              |       | (45,200            | )          | 17.16                   |       |
| Exercised                             |       | (263,292           | )          | 6.83                    |       |
| Expired                               |       | (46,453            | )          | 12.54                   |       |
| Outstanding  at July 31, 2009    |       | 1,505,722          |       | 16.32                   |       |
| Granted                               |       | 459,250            |       | 16.02                   |       |
| Canceled                              |       | (31,833            | )          | 17.35                   |       |
| Exercised                             |       | (340,876           | )          | 14.76                   |       |
| Expired                               |       | (164,400           | )          | 21.72                   |       |
| **Outstanding at July 31, 2010** | ** ** | **1,427,863**      | ** ** | **$**                   | **15.95**  | ** ** |
| ** **                            | ** ** | ** **         | ** ** | ** **              | ** ** |
| Exercisable  at July 31, 2008    |       | 1,137,624          |       | $                       | 16.28      |   |
|                                  |       |               |       |                    |       |
| Exercisable  at July 31, 2009    |       | 1,049,657          |       | $                       | 17.86      |   |
|                                  |       |               |       |                    |       |
| **Exercisable at July 31, 2010** | ** ** | **778,864**        | ** ** | **$**                   | **16.76**  | ** ** |

 

As of July 31, 2010,1,367,181 of the outstanding options had vested or were expected to vest in futureperiods and had a weighted average exercise price of $15.96.

 

Upon exercise of stockoptions or grant of stock awards, we typically issue new shares of our CommonStock (as opposed to using treasury shares).

 

If certain criteria are metwhen options are exercised or restricted stock becomes vested, the Company isallowed a deduction on its income tax return. Accordingly, we account for theincome tax effect on such income tax deductions as additional paid-in capitalor a reduction of deferred income tax assets (which are netted with long-termdeferred income tax liabilities) and as a reduction of income taxes payable. Infiscals 2010 and 2009, such income tax deductions reduced income taxes payableby $1,287,000 and $745,000, respectively.

 

Weclassify the cash flows resulting from excess tax benefits as financing cashflows on our Consolidated Statements of Cash Flows. Excess tax benefits arisewhen the ultimate tax effect of the deduction for tax purposes is greater thanthe tax benefit on stock compensation expense (including tax benefits on stockcompensation expense that has only been reflected in past pro forma disclosuresrelating to fiscal years prior to August 1, 2005) which was determinedbased upon the award’s fair value.

 

28

----

 

The following tablesummarizes additional information related to stock options outstanding at July 31,2010:

 
| ** **                      | ** ** | **Options Outstanding**        | ** ** | **Options Exercisable** | ** ** |
|---------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | ** **                          | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                          | ** ** | **Average**                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                          | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Remaining** | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | **Number**                          | ** ** | **Contractual**              | ** ** | **Average** | ** ** | **Number** | ** ** | **Contractual** | ** ** | **Average** | ** ** |
| **Range of Exercise** | ** ** | **Outstanding**                     | ** ** | **Life**                     | ** ** | **Exercise** | ** ** | **Exercisable** | ** ** | **Life** | ** ** | **Exercise** | ** ** |
| **Prices**                      | ** ** | **at July 31, 2010** | ** ** | **(Months)**                 | ** ** | **Price** | ** ** | **At July 31, 2010** | ** ** | **(Months)** | ** ** | **Price** | ** ** |
|                            |       |                                |       |                         |       |   |   |   |   |   |   |   |   |
| $8.23    - $11.58     |       | 267,612                             |       | 34                           |       | $ | 10.39 |   | 170,234 |   | 34 |   | $ | 10.33 |   |
| $14.13  - $19.79                |       | 807,750                             |       | 40                           |       | $ | 15.72 |   | 256,129 |   | 22 |   | $ | 15.60 |   |
| $20.10  - $29.49                |       | 352,501                             |       | 6                            |       | $ | 20.70 |   | 352,501 |   | 6 |   | $ | 20.70 |   |
| $8.23    - $29.49     |       | 1,427,863                           |       | 30                           |       | $ | 15.95 |   | 778,864 |   | 17 |   | $ | 16.76 |   |
|                            |       |                                |       |                         |       |   |   |   |   |   |   |   |   |
| Total  Intrinsic Value          |       | $                                   | 1,834,000  |                         |       |   |   |   | $ | 1,175,000 |   |   |   |   |   |
|                                 |            |                                     |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Asummary of our stock award plans follows:

 

***2006 Equity Incentive Plan***

 

On January 10, 2007,the Company terminated our existing stock option plans and adopted the CantelMedical Corp. 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Planprovides for the granting of stock options (including incentive stock options),restricted stock awards, stock appreciation rights and performance-based awards(collectively “equity awards”) to our employees and non-employee Directors. The2006 Plan does not permit the granting of discounted options or discountedstock appreciation rights. On December 17, 2009, our stockholders approvedan amendment to the 2006 Plan that increased the number of shares of CommonStock available for issuance under the 2006 Plan by 385,000.  The maximum number of shares as to whichstock options and stock awards may be granted under the 2006 Plan is 2,085,000shares, of which 1,200,000 shares are authorized for issuance pursuant to stockoptions and stock appreciation rights and 885,000 shares are authorized forissuance pursuant to restricted stock and other stock awards.  Stock options outstanding under this plan:

 

· were grantedat the closing market price at the time of the grant,

· were grantedas stock options that do not qualify as incentive stock options,

· as to optionsgranted to employees, are exercisable in three or four equal annualinstallments commencing on the first anniversary of the grant date,

· include optiongrants of 750 shares on the last day of each of our fiscal quarters to eachnon-employee director who attended that quarter’s regularly scheduled Board ofDirectors meeting (exercisable on the first anniversary of the grant date),

· include optiongrants of 1,500 shares on the last day of our fiscal year to each member of ourBoard of Directors (50% are exercisable on the first anniversary of the grantdate and 50% are exercisable on the second anniversary of the grant date),

· include optiongrants of 15,000 shares to each newly appointed or elected director(exercisable in three equal annual installments commencing on the firstanniversary of the grant date),

· generallyterminate three months following termination of employment or service as anon-employee director, and

· expire fiveyears from the date of the grant.

 

Commencing November 1,2009, quarterly options are no longer granted to non-employee directors and,commencing July 31, 2010, the annual grants of 1,500 options to non-employeedirectors was changed to grants of 4,500 options that are exercisable in fullon the first anniversary of the grant date.

 

Restricted stock sharesoutstanding under this plan are subject to risk of forfeiture solely due to anemployment length-of-service restriction, with such restriction lapsing as toone-third of the shares on each of the first three anniversaries of the grantdate subject to being employed by the Company through such vesting date. At July 31,2010, options to purchase 922,362 shares of Common Stock were outstanding, and158,652 unvested restricted stock shares were outstanding, under the 2006 Plan.At July 31, 2010, 193,583 shares are available for issuance pursuant tostock options

 

29

----

 

and stock appreciationrights and 462,096 shares are available for issuance pursuant to restrictedstock and other stock awards. The 2006 Plan expires on November 13, 2016.

 

***1997 Employee Plan***

 

A total of 3,750,000 sharesof Common Stock was originally reserved for issuance or available for grantunder our 1997 Employee Stock Option Plan, as amended, which was terminated on January 10,2007 in conjunction with the adoption of the 2006 Plan. Options outstandingunder this plan:

 

· were grantedat the closing market price at the time of the grant,

· were grantedeither as incentive stock options or stock options that do not qualify asincentive stock options,

· areexercisable in three or four equal annual installments commencing on the firstanniversary of the grant date,

· generallyterminate three months following termination of employment, and

· expire fiveyears from the date of the grant.

 

AtJuly 31, 2010, options to purchase 477,751 shares of Common Stock wereoutstanding under the 1997 Employee Stock Option Plan. No additional optionswill be granted under this plan.

 

***1998 Directors’ Plan***

 

A total of 450,000 shares ofCommon Stock was originally reserved for issuance or available for grant underour 1998 Directors’ Stock Option Plan, as amended, which was terminated on January 10,2007 in conjunction with the adoption of the 2006 Plan. Options outstandingunder this plan:

 

· were grantedto directors at the closing market price at the time of grant,

· include optiongrants of 15,000 shares to each newly appointed or elected director(exercisable in three equal annual installments commencing on the firstanniversary of the grant date),

· include optiongrants of 750 shares on the last day of each of our fiscal quarters to eachnon-employee director who attended that quarter’s regularly scheduled Board ofDirectors meeting (exercisable on the grant date),

· include optiongrants of 1,500 shares on the last day of our fiscal year to each member of ourBoard of Directors (50% are exercisable on the first anniversary of the grantdate and 50% are exercisable on the second anniversary of the grant date),

· have a term often years if granted prior to July 31, 2000 or five years if granted on orafter July 31, 2000, and

· do not qualifyas incentive stock options.

 

At July 31, 2010,options to purchase 27,750 shares of Common Stock were outstanding under the1998 Directors’ Stock Option Plan. No additional options will be granted underthis plan.

 

**12.          Accumulated Other Comprehensive Income**

 

The Company’s comprehensiveincome for fiscals 2010, 2009 and 2008 is set forth in the following table:

 
| ** **                                   | ** ** | **Year Ended July 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                         |       |                                   |       |   |   |   |   |
| Net  income                                  |       | $                                      | 19,941,000 |   | $ | 15,569,000 |   | $ | 8,693,000 |   |
| Other  comprehensive (loss) income:          |       |                                   |       |   |   |   |   |
| Unrealized  loss on interest cap, net of tax |       | —                                 |       | (93,000 | ) | — |   |
| Realized  loss on interest cap, net of tax   |       | —                                 |       | 93,000 |   | — |   |
| Foreign  currency translation, net of tax    |       | (236,000                               | )          | (2,010,000 | ) | 1,797,000 |   |
| Comprehensive  income                        |       | $                                      | 19,705,000 |   | $ | 13,559,000 |   | $ | 10,490,000 |   |

 

We purchased an interestrate cap agreement at the end of our fiscal 2008, which capped three-monthLIBOR on outstanding borrowings under our term loan facility at 4.25%. In July 2009,this interest rate cap agreement was

 

30

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determined to be ineffectivesince the interest rates on substantially all of our outstanding borrowingsunder our term loan facility were protected under LIBOR contracts substantiallybelow 4.25%. Accordingly, we reclassified the ineffective portion of the changein fair value of the interest rate cap agreement from an unrealized loss inaccumulated other comprehensive income into a recognized loss in interestexpense in the Consolidated Statements of Income.

 

For purposes of translatingthe balance sheet at July 31, 2010 compared with July 31, 2009, thevalue of the Canadian dollar increased and the euro decreased by approximately4.7% and 7.2%, respectively, compared with the value of the United Statesdollar. The total of these currency movements increased the accumulatedtranslation adjustment before tax. However, due to a tax adjustment relating toforeign repatriations, the accumulated translation adjustment decreased by$236,000 during fiscal 2010 to $8,045,000 at July 31, 2010, from $8,281,000at July 31, 2009.

 

**13.          Earnings Per Common Share**

 

Basic EPS are computed basedupon the weighted average number of common shares outstanding during the year.Diluted EPS is computed based upon the weighted average number of common sharesoutstanding during the year plus the dilutive effect of Common Stockequivalents using the treasury stock method and the average market price of ourCommon Stock for the year.

 

InJune 2008, the FASB issued ASC260-10-45, which provides that unvested share-based payment awards thatcontain nonforfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and shall be included in thecomputation of EPS pursuant to the two-class method, a change that reduces bothbasic and diluted EPS. Our participating securities consist solely ofunvested restricted stock awards, which have contractual participation rightsequivalent to those of stockholders of unrestricted common stock. The two-classmethod of computing earnings per share is an allocation method that calculatesearnings per share for common stock and participating securities. Previously,we excluded unvested restricted stock awards in the calculation of basic EPSand included such awards in diluted EPS under the treasury stock method. ASC260-10-45 was effective for fiscal years beginning after December 15, 2008and therefore was adopted on August 1, 2009. All prior period EPS datapresented have been adjusted retrospectively to conform to the provisions ofASC 260-10-45. In fiscals 2009 and 2008, such retrospective applicationcaused an insignificant increase in the denominator of our weighted averageshares calculation, which decreased previously reported basic EPS in fiscals2009 and 2008 from $0.96 to $0.94 and $0.54 to $0.53, respectively, but had noimpact on previously reported diluted EPS.

 

31

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The following table setsforth the computation of basic and diluted EPS available to shareholders ofcommon stock (excluding participating securities):

 
| ** **                                                                                                                                 | ** ** | **Year Ended July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator  for basic and diluted earnings per share:                                                                                       |       |                                   |       |   |   |   |   |
| Net  income                                                                                                                                |       | $                                      | 19,941,000 |   | $ | 15,569,000 |   | $ | 8,693,000 |   |
| Less  income allocated to participating securities                                                                                         |       | (260,000                               | )          | (218,000 | ) | (85,000 | ) |
| Net  income available to common shareholders                                                                                               |       | $                                      | 19,681,000 |   | $ | 15,351,000 |   | $ | 8,608,000 |   |
|                                                                                                                                       |       |                                   |       |   |   |   |   |
| Denominator  for basic and diluted earnings per share, as adjusted for participating  securities:                                          |       |                                   |       |   |   |   |   |
| Denominator  for basic earnings per share - weighted average number of shares outstanding attributable  to common stock                    |       | 16,554,109                             |       | 16,287,446 |   | 16,116,360 |   |
|                                                                                                                                       |       |                                   |       |   |   |   |   |
| Dilutive  effect of stock options using the treasury stock method and the average  market price for the period                             |       | 190,217                                |       | 57,172 |   | 163,944 |   |
|                                                                                                                                       |       |                                   |       |   |   |   |   |
| Denominator  for diluted earnings per share - weighted average number of shares and common  stock equivalents attributable to common stock |       | 16,744,326                             |       | 16,344,618 |   | 16,280,304 |   |
|                                                                                                                                       |       |                                   |       |   |   |   |   |
| Earnings  per share attributable to common stock:                                                                                          |       |                                   |       |   |   |   |   |
| Basic  earnings per share                                                                                                                  |       | $                                      | 1.19       |   | $ | 0.94 |   | $ | 0.53 |   |
|                                                                                                                                       |       |                                   |       |   |   |   |   |
| Diluted  earnings per share                                                                                                                |       | $                                      | 1.18       |   | $ | 0.94 |   | $ | 0.53 |   |
|                                                                                                                                       |       |                                   |       |   |   |   |   |
| Stock  options excluded from weighted average dilutive common shares outstanding  because their inclusion would have been antidilutive     |       | 671,901                                |       | 1,308,140 |   | 1,324,351 |   |

 

A reconciliation of weightedaverage number of shares and common stock equivalents attributable to commonstock, as determined above, to the Company’s total weighted average number ofshares and common stock equivalents, including participating securities, areset forth in the following table:

 
| ** **                                                                                                                                 | ** ** | **Year Ended July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Denominator  for diluted earnings per share - weighted average number of shares and common  stock equivalents attributable to common stock |       | 16,744,326                             |       | 16,344,618 |   | 16,280,304 |   |
|                                                                                                                                       |       |                                   |       |   |   |   |   |
| Participating  securities                                                                                                                  |       | 223,315                                |       | 231,718 |   | 160,022 |   |
|                                                                                                                                       |       |                                   |       |   |   |   |   |
| Total  weighted average number of shares and common stock equivalents attributable  to both common stock and participating securities      |       | 16,967,641                             |       | 16,576,336 |   | 16,440,326 |   |

 

32

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**14.*****        *****Repurchaseof Shares**

 

In May 2008, our Boardof Directors approved the repurchase of up to 500,000 shares of our outstandingCommon Stock under a repurchase program commencing on June 9, 2008. Underthe repurchase program we repurchased shares from time-to-time at prevailingprices and as permitted by applicable securities laws (including SEC Rule 10b-18)and New York Stock Exchange requirements, and subject to market conditions. Therepurchase program had a one-year term that expired on June 8, 2009.

 

The first repurchase underour repurchase program occurred on July 11, 2008. Through July 31,2008, we completed the repurchase of 90,700 shares under the program at a totalaverage price per share of $9.42. We repurchased an additional 43,847 sharesthrough October 31, 2008 at a total average price per share of $9.17. Noadditional repurchases were made subsequent to the end of our first quarterended October 31, 2008. Therefore, at the conclusion of the repurchaseprogram on June 8, 2009, we had repurchased 134,547 shares under therepurchase program at a total average price per share of $9.34.

 

The Company does notcurrently have a publicly announced stock repurchase program. All of the sharespurchased during fiscal 2010 represent shares surrendered to the Company to payemployee withholding taxes due upon the vesting of restricted stock or theexercise of stock options that do not qualify as incentive stock options.

 

**15.          Retirement Plans**

 

We have 401(k) Savingsand Retirement Plans for the benefit of eligible United States employees.Additionally, our Canadian subsidiaries maintain profit sharing plans for thebenefit of eligible employees. Contributions by the Company are bothdiscretionary and non-discretionary and are limited in any year to the amountallowable by tax authorities in the United States or Canada.

 

Aggregate employercontributions recognized under these plans were $1,671,000, $1,745,000 and$1,315,000 for fiscals 2010, 2009 and 2008, respectively.

 

**16.          Supplemental Cash Flow Information**

 

Interest paid was $919,000,$2,256,000 and $4,332,000 for fiscals 2010, 2009 and 2008, respectively.

 

Income tax payments were$12,712,000, $10,602,000 and $5,774,000 for fiscals 2010, 2009 and 2008,respectively.

 

**17.****                              ****Informationas to Operating Segments and Foreign and Domestic Operations**

 

We are a leading provider ofinfection prevention and control products and services in the healthcaremarket. Our products include specialized medical device reprocessing systemsfor renal dialysis and endoscopy, dialysate concentrates and other dialysissupplies, water purification equipment, sterilants, disinfectants and cleaners,hollow fiber membrane filtration and separation products for medical andnon-medical applications, and specialty packaging for infectious and biologicalspecimens. We also provide technical maintenance for our products and offercompliance training services for the transport of infectious and biologicalspecimens.

 

In accordance with FASB ASCTopic 280, “*Segment Reporting,”* (“ASC 280”), we have determined ourreportable business segments based upon an assessment of product types,organizational structure, customers and internally prepared financialstatements. The primary factors used by us in analyzing segment performance arenet sales and operating income.

 

During fiscal 2010, wechanged our internal reporting processes to include a new operating segmentcalled Chemistries to reflect the way the Company, through its executivemanagement, manages, allocates resources and measures the performance of itsbusinesses. This new operating segment is the combination of a small portion ofour existing sterilant business, comprised of products sold on an OEM basis andpreviously recorded in our Water Purification and Filtration segment, and a newbusiness operation that was created to capitalize on our chemistry expertiseand expand our product offerings in existing and new markets within theinfection prevention and control arena. All periods presented have beenrestated to reflect this change.

 

33

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The Company’s segments areas follows:

 

**Water Purification and Filtration**, whichincludes water purification equipment design and manufacturing, projectmanagement, installation, maintenance, deionization and mixing systems, as wellas hollow fiber filter devices and ancillary products for high-purity fluid andseparation applications for healthcare (with a large concentration indialysis), pharmaceutical, biotechnology, research, beverage, semiconductor andother commercial industries. Additionally, this segment includes cold sterilantproducts used to disinfect high-purity water systems.

 

One customer accounted forapproximately 24% of our Water Purification and Filtration segment net salesand approximately 7% of our consolidated net sales in fiscal 2010.

 

**Healthcare Disposables**, whichincludes single-use infection prevention and control products used principallyin the dental market such as face masks, sterilization pouches, patient towelsand bibs, self-sealing sterilization pouches, tray covers, surface barriersincluding eyewear, aprons and gowns, disinfectants, germicidal wipes, hand careproducts, gloves, sponges, cotton products, cups, needles and syringes,scalpels and blades, and saliva evacuators and ejectors.

 

Four customers collectivelyaccounted for approximately 55% of our Healthcare Disposables segment net salesand approximately 14% of our consolidated net sales in fiscal 2010.

 

**Endoscope Reprocessing**, whichincludes endoscope disinfection equipment and related accessories,disinfectants and supplies that are sold to hospitals, clinics and physicians.Additionally, this segment includes technical maintenance service on itsproducts.

 

**Dialysis**, whichincludes disinfection/sterilization reprocessing equipment, sterilants,supplies and concentrates related to hemodialysis treatment of patients withacute kidney failure or chronic kidney failure associated with end-stage renaldisease. Additionally, this segment includes technical maintenance service onits products.

 

One customer collectivelyaccounted for approximately 33% of our Dialysis segment net sales andapproximately 8% of our consolidated net sales in fiscal 2010.

 

**All Other**

 

In accordance withquantitative thresholds established by ASC 280, we have combined for reportingpurposes the Therapeutic Filtration, Specialty Packaging and Chemistriesoperating segments into the All Other reporting segment.

 

**TherapeuticFiltration**, which includes hollow fiber filter devices andancillary products for use in medical applications that are sold to biotech manufacturersand third-party distributors.

 

**SpecialtyPackaging**, which includes specialty packaging and thermalcontrol products, as well as related compliance training, for the safetransport of infectious and biological specimens and thermally sensitive pharmaceutical,medical and other products.

 

**Chemistries,**which includessterilants, disinfectants, detergents and decontamination services used invarious applications for infection prevention and control.

 

The operating segmentsfollow the same accounting policies used for our Consolidated FinancialStatements as described in Note 2.

 

34

----

 

Information as to operatingsegments is summarized below:

 
| ** **                         | ** ** | **Year Ended July 31,** | ** **  |
|------------------------------------|------------|----------------------------------------|-------------|
| ** **                         | ** ** | **2010**                               | ** **  | **2009** | ** ** | **2008** | ** ** |
|                               |       |                                   |        |   |   |   |   |
| Net  sales:                        |       |                                   |        |   |   |   |   |
| Water  Purification and Filtration |       | $                                      | 74,527,000  |   | $ | 68,941,000 |   | $ | 66,323,000 |   |
| Healthcare  Disposables            |       | 69,729,000                             |        | 64,085,000 |   | 58,657,000 |   |
| Endoscope  Reprocessing            |       | 65,577,000                             |        | 52,333,000 |   | 46,924,000 |   |
| Dialysis                           |       | 44,667,000                             |        | 56,414,000 |   | 60,075,000 |   |
| All  Other                         |       | 19,452,000                             |        | 18,277,000 |   | 17,395,000 |   |
| Total                              |       | $                                      | 273,952,000 |   | $ | 260,050,000 |   | $ | 249,374,000 |   |
|                               |       |                                   |        |   |   |   |   |
| Operating  Income:                 |       |                                   |        |   |   |   |   |
| Water  Purification and Filtration |       | $                                      | 7,698,000   |   | $ | 6,055,000 |   | $ | 4,975,000 |   |
| Healthcare  Disposables            |       | 12,104,000                             |        | 9,489,000 |   | 7,357,000 |   |
| Endoscope  Reprocessing            |       | 7,575,000                              |        | 5,927,000 |   | 1,281,000 |   |
| Dialysis                           |       | 10,201,000                             |        | 10,679,000 |   | 8,620,000 |   |
| All  Other                         |       | 4,104,000                              |        | 3,888,000 |   | 3,950,000 |   |
|                               |       | 41,682,000                             |        | 36,038,000 |   | 26,183,000 |   |
| General  corporate expenses        |       | (9,017,000                             | )           | (8,587,000 | ) | (8,216,000 | ) |
| Interest  expense, net             |       | (1,110,000                             | )           | (2,495,000 | ) | (4,116,000 | ) |
|                               |       |                                   |        |   |   |   |   |
| Income  before income taxes        |       | $                                      | 31,555,000  |   | $ | 24,956,000 |   | $ | 13,851,000 |   |

 

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| ** **                                              | ** ** | **July 31,** | ** **  |
|---------------------------------------------------------|------------|-------------------|-------------|
| ** **                                              | ** ** | **2010**          | ** **  | **2009** | ** ** | **2008** | ** ** |
| Identifiable  assets:                                   |       |              |        |   |   |   |   |
| Water  Purification and Filtration                      |       | $                 | 75,920,000  |   | $ | 71,628,000 |   | $ | 70,315,000 |   |
| Healthcare  Disposables                                 |       | 97,163,000        |        | 100,279,000 |   | 104,377,000 |   |
| Endoscope  Reprocessing                                 |       | 36,208,000        |        | 33,379,000 |   | 31,546,000 |   |
| Dialysis                                                |       | 28,076,000        |        | 29,622,000 |   | 32,536,000 |   |
| All  Other                                              |       | 19,602,000        |        | 18,582,000 |   | 20,642,000 |   |
| General  corporate, including cash and cash equivalents |       | 23,696,000        |        | 24,381,000 |   | 19,774,000 |   |
| Total                                                   |       | $                 | 280,665,000 |   | $ | 277,871,000 |   | $ | 279,190,000 |   |

 
| ** **                         | ** ** | **Year Ended July 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Capital  expenditures:             |       |                                   |       |   |   |   |   |
| Water  Purification and Filtration |       | $                                      | 1,909,000  |   | $ | 1,257,000 |   | $ | 1,352,000 |   |
| Healthcare  Disposables            |       | 1,731,000                              |       | 1,071,000 |   | 952,000 |   |
| Endoscope  Reprocessing            |       | 605,000                                |       | 801,000 |   | 869,000 |   |
| Dialysis                           |       | 930,000                                |       | 853,000 |   | 1,429,000 |   |
| All  Other                         |       | 426,000                                |       | 231,000 |   | 356,000 |   |
| General  corporate                 |       | 4,000                                  |       | 2,000 |   | 25,000 |   |
| Total                              |       | $                                      | 5,605,000  |   | $ | 4,215,000 |   | $ | 4,983,000 |   |

 
| ** **                         | ** ** | **Year Ended July 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Depreciation  and amortization:    |       |                                   |       |   |   |   |   |
| Water  Purification and Filtration |       | $                                      | 2,587,000  |   | $ | 2,336,000 |   | $ | 2,319,000 |   |
| Healthcare  Disposables            |       | 5,600,000                              |       | 5,490,000 |   | 5,375,000 |   |
| Endoscope  Reprocessing            |       | 1,106,000                              |       | 1,188,000 |   | 1,458,000 |   |
| Dialysis                           |       | 1,364,000                              |       | 1,482,000 |   | 1,617,000 |   |
| All  Other                         |       | 749,000                                |       | 836,000 |   | 926,000 |   |
| General  corporate                 |       | 32,000                                 |       | 37,000 |   | 37,000 |   |
| Total                              |       | $                                      | 11,438,000 |   | $ | 11,369,000 |   | $ | 11,732,000 |   |

 

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Information as to geographicareas (including net sales which represent the geographic area from which theCompany derives its net sales from external customers) is summarized below:

 
| ** **                   | ** ** | **Year Ended July 31,** | ** **  |
|------------------------------|------------|----------------------------------------|-------------|
| ** **                   | ** ** | **2010**                               | ** **  | **2009** | ** ** | **2008** | ** ** |
|                         |       |                                   |        |   |   |   |   |
| Net  sales:                  |       |                                   |        |   |   |   |   |
| United  States               |       | $                                      | 225,725,000 |   | $ | 214,909,000 |   | $ | 203,087,000 |   |
| Canada                       |       | 13,225,000                             |        | 10,476,000 |   | 11,217,000 |   |
| Asia/Pacific                 |       | 13,082,000                             |        | 11,103,000 |   | 10,247,000 |   |
| Europe/Africa/Middle  East   |       | 17,772,000                             |        | 13,366,000 |   | 15,905,000 |   |
| Latin  America/South America |       | 4,148,000                              |        | 10,196,000 |   | 8,918,000 |   |
| Total                        |       | $                                      | 273,952,000 |   | $ | 260,050,000 |   | $ | 249,374,000 |   |

 
| ** **                      | ** ** | **July 31,** | ** **  |
|---------------------------------|------------|-------------------|-------------|
| ** **                      | ** ** | **2010**          | ** **  | **2009** | ** ** | **2008** | ** ** |
| Total  long-lived assets:       |       |              |        |   |   |   |   |
| United  States                  |       | $                 | 34,779,000  |   | $ | 35,398,000 |   | $ | 35,698,000 |   |
| Canada                          |       | 1,223,000         |        | 1,219,000 |   | 1,435,000 |   |
| Asia/Pacific                    |       | 288,000           |        | 170,000 |   | 122,000 |   |
| Europe                          |       | 144,000           |        | 137,000 |   | 2,162,000 |   |
| Total                           |       | 36,434,000        |        | 36,924,000 |   | 39,417,000 |   |
| Goodwill  and intangible assets |       | 149,500,000       |        | 152,037,000 |   | 155,212,000 |   |
| Total                           |       | $                 | 185,934,000 |   | $ | 188,961,000 |   | $ | 194,629,000 |   |

 

**18.*****         *****RestructuringActivities**

 

During the fourth quarter offiscal 2008, our management approved and initiated plans to restructure ourNetherlands subsidiary by relocating all of our manufacturing operations fromthe Netherlands to the United States. This action is part of our continuingeffort to reduce operating costs and improve efficiencies by leveraging theexisting infrastructure of our Minntech operations in Minnesota. Theelimination of manufacturing operations in the Netherlands has led to the endof onsite material management, quality assurance, finance and accounting, humanresources and some customer service functions. However, we continue to maintaina strong marketing, sales, service and technical support presence based in theNetherlands to serve customers throughout Europe, the Middle East and Africa.

 

In fiscals 2009 and 2008, werecorded $345,000 and $365,000, respectively, in restructuring costs, whichdecreased both basic and diluted earnings per share by approximately $0.02 inboth years. In fiscal 2009, $163,000 was recorded in cost of sales and $182,000was recorded in general and administrative expenses. In fiscal 2008, $275,000was recorded in cost of sales and $90,000 was recorded in general andadministrative expenses. The restructuring plan was completed by July 31,2009 and we have not incurred any additional restructuring costs since thatdate. The majority of the restructuring costs were included in our EndoscopeReprocessing segment. Since the above costs were recorded in our Netherlandssubsidiary, which had been experiencing losses from its operations, taxbenefits on the above costs were not recorded.

 

As part of the restructuringplan, we sold our Netherlands building and land on May 19, 2009 andentered into a lease for 2.5 years with the new owner so we can continue to usethe facility as our European sales and service headquarters as well as forwarehouse and distribution activity. The sale of the building and land resultedin a gain of $146,000, which is being amortized over the life of the lease andis recorded in deferred revenue and other long-term liabilities. The rent forthe full 2.5 year lease of $325,000 was paid from the sale proceeds andrecorded in prepaid expenses and other assets.

 

37

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**19.          Quarterly Results of Operations(unaudited)**

 

The following is a summaryof the quarterly results of operations for the years ended July 31, 2010and 2009:

 
| ** **                  | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                  | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| **2010**                    |       |        |       |        |       |        |       |        |       |
| Net  sales                  |       | $           | 70,995,000 |        | $          | 66,587,000  |       | $           | 66,559,000 |   | $ | 69,811,000 |   |
| Cost  of sales              |       | 41,537,000  |       | 39,463,000  |       | 39,866,000  |       | 42,115,000  |       |
| Gross  profit               |       | 29,458,000  |       | 27,124,000  |       | 26,693,000  |       | 27,696,000  |       |
| Gross  profit percentage    | * *   | *41.5*      | *%*        | *40.7*      | *%*        | *40.1*      | *%*        | *39.7*      | *%*        |
|                        |       |        |       |        |       |        |       |        |       |
| Net  income                 |       | $           | 6,168,000  |        | $          | 4,876,000   |       | $           | 4,274,000  |   | $ | 4,623,000 |   |
|                        |       |        |       |        |       |        |       |        |       |
| Earnings  per common share: |       |        |       |        |       |        |       |        |       |
| Basic  (1)                  |       | $           | 0.37       |        | $          | 0.29        |       | $           | 0.25       |   | $ | 0.27 |   |
| Diluted                     |       | $           | 0.37       |        | $          | 0.29        |       | $           | 0.25       |   | $ | 0.27 |   |

 
| ** **                  | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                  | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| **2009**                    |       |        |       |        |       |        |       |        |       |
| Net  sales                  |       | $           | 64,406,000 |        | $          | 62,420,000  |       | $           | 66,431,000 |   | $ | 66,793,000 |   |
| Cost  of sales              |       | 40,783,000  |       | 38,809,000  |       | 40,908,000  |       | 40,071,000  |       |
| Gross  profit               |       | 23,623,000  |       | 23,611,000  |       | 25,523,000  |       | 26,722,000  |       |
| Gross  profit percentage    | * *   | *36.7*      | *%*        | *37.8*      | *%*        | *38.4*      | *%*        | *40.0*      | *%*        |
|                        |       |        |       |        |       |        |       |        |       |
| Net  income                 |       | $           | 3,333,000  |        | $          | 3,774,000   |       | $           | 4,183,000  |   | $ | 4,279,000 |   |
|                        |       |        |       |        |       |        |       |        |       |
| Earnings  per common share: |       |        |       |        |       |        |       |        |       |
| Basic                       |       | $           | 0.20       |        | $          | 0.23        |       | $           | 0.25       |   | $ | 0.26 |   |
| Diluted                     |       | $           | 0.20       |        | $          | 0.23        |       | $           | 0.25       |   | $ | 0.26 |   |

 

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(1) The summation of quarterly earnings per share does not necessarily equal thefiscal year earnings per share due to rounding.

 

**20.          Legal Proceedings**

 

In the normal course ofbusiness, we are subject to pending and threatened legal actions. It is ourpolicy to accrue for amounts related to these legal matters if it is probablethat a liability has been incurred and an amount of anticipated exposure can bereasonably estimated. We do not believe that any of these pending claims orlegal actions will have a material adverse effect on our business, financialcondition, results of operations or cash flows.

 

**21.          Convertible Note Receivable**

 

In February 2009, weinvested an initial $200,000 in a senior subordinated convertible promissorynote issued by BIOSAFE, Inc. (“BIOSAFE”), in connection with BIOSAFE’sgrant to us of certain exclusive and non-exclusive license rights to BIOSAFE’santimicrobial additive. BIOSAFE is the owner of a patented and proprietaryantimicrobial agent that is built into the manufacturing of end-products toachieve long-lasting microbial protection on such end-products’ surface. As aresult of BIOSAFE’s successful raising of a minimum incremental amount of cashfollowing our investment, we invested an additional $300,000 in notes ofBIOSAFE in January 2010 bringing the aggregate investment in BIOSAFE notesto $500,000, as obligated under our agreement with BIOSAFE. We are notobligated to invest any additional funds.

 

The notes are convertibleinto a newly-created series of preferred stock of BIOSAFE. Interest is payablein shares of BIOSAFE stock or in cash. The notes accrue interest at a per annumrate of 8% until the maturity date of June 30, 2011 or earlier exercise.If not paid by the maturity date, interest will accrue thereafter at a rate of12% per annum. In connection with our investment, we entered into a licenseagreement with BIOSAFE under which we will pay BIOSAFE a fixed royalty percentageof sales of our products containing BIOSAFE’s antimicrobial formulation. Thisinvestment, together with the accrued interest, is included within other assetsin our Consolidated Balance Sheet at July 31, 2010 and 2009. The carryingvalue of this investment approximates fair value due to the short maturity ofthe notes and the relative consistent underlying value of BIOSAFE.

 

38

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**CANTEL MEDICAL CORP.**

 

SCHEDULEII - VALUATION AND QUALIFYING ACCOUNTS

 
| ** **                        | ** ** | **Balance at** | ** ** | ** **    | ** ** | ** **       | ** ** | ** **      | ** ** | **Balance**        | ** ** |
|-----------------------------------|------------|---------------------|------------|---------------|------------|------------------|------------|-----------------|------------|--------------------|------------|
| ** **                        | ** ** | **Beginning**       | ** ** | ** **    | ** ** | ** **       | ** ** | **Translation** | ** ** | **at End**    | ** ** |
| ** **                        | ** ** | **of Period**  | ** ** | **Additions** | ** ** | **(Deductions)** | ** ** | **Adjustments** | ** ** | **of Period** | ** ** |
|                              |       |                |       |          |       |             |       |            |       |               |       |
| Allowance  for doubtful accounts: |       |                |       |          |       |             |       |            |       |               |       |
|                              |       |                |       |          |       |             |       |            |       |               |       |
| Year  ended July 31, 2010    |       | $                   | 1,080,000  |          | $          | 59,000           | (1)        | $               | (276,000   | )                  | $          | 7,000 |   | $ | 870,000 |   |
|                              |       |                |       |          |       |             |       |            |       |               |       |
| Year  ended July 31, 2009    |       | $                   | 1,021,000  |          | $          | 309,000          |       | $               | (207,000   | )                  | $          | (43,000 | ) | $ | 1,080,000 |   |
|                              |       |                |       |          |       |             |       |            |       |               |       |
| Year  ended July 31, 2008    |       | $                   | 927,000    |          | $          | 404,000          |       | $               | (351,000   | )                  | $          | 41,000 |   | $ | 1,021,000 |   |

 

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(1)          The significantly loweramount of additions in fiscal 2010, as compared with fiscals 2009 and 2008, wasprimarily due to the collection of several large delinquent receivables, whichhad been reserved in past fiscal years.

 

39

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